FAC Explorer

Audit 360024

FY End
2024-09-30
Total Expended
$196.98M
Findings
440
Programs
20
Organization: Src, Inc. (NY)
Year: 2024 Accepted: 2025-06-26
Auditor: Bdo USA PC

Organization Exclusion Status:

Findings

ID Ref Severity Repeat Requirement
567133 2024-001 Significant Deficiency Yes AB
567134 2024-002 Significant Deficiency - AB
567135 2024-001 Significant Deficiency Yes AB
567136 2024-002 Significant Deficiency - AB
567137 2024-001 Significant Deficiency Yes AB
567138 2024-002 Significant Deficiency - AB
567139 2024-001 Significant Deficiency Yes AB
567140 2024-002 Significant Deficiency - AB
567141 2024-001 Significant Deficiency Yes AB
567142 2024-002 Significant Deficiency - AB
567143 2024-001 Significant Deficiency Yes AB
567144 2024-002 Significant Deficiency - AB
567145 2024-001 Significant Deficiency Yes AB
567146 2024-002 Significant Deficiency - AB
567147 2024-001 Significant Deficiency Yes AB
567148 2024-002 Significant Deficiency - AB
567149 2024-001 Significant Deficiency Yes AB
567150 2024-002 Significant Deficiency - AB
567151 2024-001 Significant Deficiency Yes AB
567152 2024-002 Significant Deficiency - AB
567153 2024-001 Significant Deficiency Yes AB
567154 2024-002 Significant Deficiency - AB
567155 2024-001 Significant Deficiency Yes AB
567156 2024-002 Significant Deficiency - AB
567157 2024-001 Significant Deficiency Yes AB
567158 2024-002 Significant Deficiency - AB
567159 2024-001 Significant Deficiency Yes AB
567160 2024-002 Significant Deficiency - AB
567161 2024-001 Significant Deficiency Yes AB
567162 2024-002 Significant Deficiency - AB
567163 2024-001 Significant Deficiency Yes AB
567164 2024-002 Significant Deficiency - AB
567165 2024-001 Significant Deficiency Yes AB
567166 2024-002 Significant Deficiency - AB
567167 2024-001 Significant Deficiency Yes AB
567168 2024-002 Significant Deficiency - AB
567169 2024-001 Significant Deficiency Yes AB
567170 2024-002 Significant Deficiency - AB
567171 2024-001 Significant Deficiency Yes AB
567172 2024-002 Significant Deficiency - AB
567173 2024-001 Significant Deficiency Yes AB
567174 2024-002 Significant Deficiency - AB
567175 2024-001 Significant Deficiency Yes AB
567176 2024-002 Significant Deficiency - AB
567177 2024-001 Significant Deficiency Yes AB
567178 2024-002 Significant Deficiency - AB
567179 2024-001 Significant Deficiency Yes AB
567180 2024-002 Significant Deficiency - AB
567181 2024-001 Significant Deficiency Yes AB
567182 2024-002 Significant Deficiency - AB
567183 2024-001 Significant Deficiency Yes AB
567184 2024-002 Significant Deficiency - AB
567185 2024-001 Significant Deficiency Yes AB
567186 2024-002 Significant Deficiency - AB
567187 2024-001 Significant Deficiency Yes AB
567188 2024-002 Significant Deficiency - AB
567189 2024-001 Significant Deficiency Yes AB
567190 2024-002 Significant Deficiency - AB
567191 2024-001 Significant Deficiency Yes AB
567192 2024-002 Significant Deficiency - AB
567193 2024-001 Significant Deficiency Yes AB
567194 2024-002 Significant Deficiency - AB
567195 2024-001 Significant Deficiency Yes AB
567196 2024-002 Significant Deficiency - AB
567197 2024-001 Significant Deficiency Yes AB
567198 2024-002 Significant Deficiency - AB
567199 2024-001 Significant Deficiency Yes AB
567200 2024-002 Significant Deficiency - AB
567201 2024-001 Significant Deficiency Yes AB
567202 2024-002 Significant Deficiency - AB
567203 2024-001 Significant Deficiency Yes AB
567204 2024-002 Significant Deficiency - AB
567205 2024-001 Significant Deficiency Yes AB
567206 2024-002 Significant Deficiency - AB
567207 2024-001 Significant Deficiency Yes AB
567208 2024-002 Significant Deficiency - AB
567209 2024-001 Significant Deficiency Yes AB
567210 2024-002 Significant Deficiency - AB
567211 2024-001 Significant Deficiency Yes AB
567212 2024-002 Significant Deficiency - AB
567213 2024-001 Significant Deficiency Yes AB
567214 2024-002 Significant Deficiency - AB
567215 2024-001 Significant Deficiency Yes AB
567216 2024-002 Significant Deficiency - AB
567217 2024-001 Significant Deficiency Yes AB
567218 2024-002 Significant Deficiency - AB
567219 2024-001 Significant Deficiency Yes AB
567220 2024-002 Significant Deficiency - AB
567221 2024-001 Significant Deficiency Yes AB
567222 2024-002 Significant Deficiency - AB
567223 2024-001 Significant Deficiency Yes AB
567224 2024-002 Significant Deficiency - AB
567225 2024-001 Significant Deficiency Yes AB
567226 2024-002 Significant Deficiency - AB
567227 2024-001 Significant Deficiency Yes AB
567228 2024-002 Significant Deficiency - AB
567229 2024-001 Significant Deficiency Yes AB
567230 2024-002 Significant Deficiency - AB
567231 2024-001 Significant Deficiency Yes AB
567232 2024-002 Significant Deficiency - AB
567233 2024-001 Significant Deficiency Yes AB
567234 2024-002 Significant Deficiency - AB
567235 2024-001 Significant Deficiency Yes AB
567236 2024-002 Significant Deficiency - AB
567237 2024-001 Significant Deficiency Yes AB
567238 2024-002 Significant Deficiency - AB
567239 2024-001 Significant Deficiency Yes AB
567240 2024-002 Significant Deficiency - AB
567241 2024-001 Significant Deficiency Yes AB
567242 2024-002 Significant Deficiency - AB
567243 2024-001 Significant Deficiency Yes AB
567244 2024-002 Significant Deficiency - AB
567245 2024-001 Significant Deficiency Yes AB
567246 2024-002 Significant Deficiency - AB
567247 2024-001 Significant Deficiency Yes AB
567248 2024-002 Significant Deficiency - AB
567249 2024-001 Significant Deficiency Yes AB
567250 2024-002 Significant Deficiency - AB
567251 2024-001 Significant Deficiency Yes AB
567252 2024-002 Significant Deficiency - AB
567253 2024-001 Significant Deficiency Yes AB
567254 2024-002 Significant Deficiency - AB
567255 2024-001 Significant Deficiency Yes AB
567256 2024-002 Significant Deficiency - AB
567257 2024-001 Significant Deficiency Yes AB
567258 2024-002 Significant Deficiency - AB
567259 2024-001 Significant Deficiency Yes AB
567260 2024-002 Significant Deficiency - AB
567261 2024-001 Significant Deficiency Yes AB
567262 2024-002 Significant Deficiency - AB
567263 2024-001 Significant Deficiency Yes AB
567264 2024-002 Significant Deficiency - AB
567265 2024-001 Significant Deficiency Yes AB
567266 2024-002 Significant Deficiency - AB
567267 2024-001 Significant Deficiency Yes AB
567268 2024-002 Significant Deficiency - AB
567269 2024-001 Significant Deficiency Yes AB
567270 2024-002 Significant Deficiency - AB
567271 2024-001 Significant Deficiency Yes AB
567272 2024-002 Significant Deficiency - AB
567273 2024-001 Significant Deficiency Yes AB
567274 2024-002 Significant Deficiency - AB
567275 2024-001 Significant Deficiency Yes AB
567276 2024-002 Significant Deficiency - AB
567277 2024-001 Significant Deficiency Yes AB
567278 2024-002 Significant Deficiency - AB
567279 2024-001 Significant Deficiency Yes AB
567280 2024-002 Significant Deficiency - AB
567281 2024-001 Significant Deficiency Yes AB
567282 2024-002 Significant Deficiency - AB
567283 2024-001 Significant Deficiency Yes AB
567284 2024-002 Significant Deficiency - AB
567285 2024-001 Significant Deficiency Yes AB
567286 2024-002 Significant Deficiency - AB
567287 2024-001 Significant Deficiency Yes AB
567288 2024-002 Significant Deficiency - AB
567289 2024-001 Significant Deficiency Yes AB
567290 2024-002 Significant Deficiency - AB
567291 2024-001 Significant Deficiency Yes AB
567292 2024-002 Significant Deficiency - AB
567293 2024-001 Significant Deficiency Yes AB
567294 2024-002 Significant Deficiency - AB
567295 2024-001 Significant Deficiency Yes AB
567296 2024-002 Significant Deficiency - AB
567297 2024-001 Significant Deficiency Yes AB
567298 2024-002 Significant Deficiency - AB
567299 2024-001 Significant Deficiency Yes AB
567300 2024-002 Significant Deficiency - AB
567301 2024-001 Significant Deficiency Yes AB
567302 2024-002 Significant Deficiency - AB
567303 2024-001 Significant Deficiency Yes AB
567304 2024-002 Significant Deficiency - AB
567305 2024-001 Significant Deficiency Yes AB
567306 2024-002 Significant Deficiency - AB
567307 2024-001 Significant Deficiency Yes AB
567308 2024-002 Significant Deficiency - AB
567309 2024-001 Significant Deficiency Yes AB
567310 2024-002 Significant Deficiency - AB
567311 2024-001 Significant Deficiency Yes AB
567312 2024-002 Significant Deficiency - AB
567313 2024-001 Significant Deficiency Yes AB
567314 2024-002 Significant Deficiency - AB
567315 2024-001 Significant Deficiency Yes AB
567316 2024-002 Significant Deficiency - AB
567317 2024-001 Significant Deficiency Yes AB
567318 2024-002 Significant Deficiency - AB
567319 2024-001 Significant Deficiency Yes AB
567320 2024-002 Significant Deficiency - AB
567321 2024-001 Significant Deficiency Yes AB
567322 2024-002 Significant Deficiency - AB
567323 2024-001 Significant Deficiency Yes AB
567324 2024-002 Significant Deficiency - AB
567325 2024-001 Significant Deficiency Yes AB
567326 2024-002 Significant Deficiency - AB
567327 2024-001 Significant Deficiency Yes AB
567328 2024-002 Significant Deficiency - AB
567329 2024-001 Significant Deficiency Yes AB
567330 2024-002 Significant Deficiency - AB
567331 2024-001 Significant Deficiency Yes AB
567332 2024-002 Significant Deficiency - AB
567333 2024-001 Significant Deficiency Yes AB
567334 2024-002 Significant Deficiency - AB
567335 2024-001 Significant Deficiency Yes AB
567336 2024-002 Significant Deficiency - AB
567337 2024-001 Significant Deficiency Yes AB
567338 2024-002 Significant Deficiency - AB
567339 2024-001 Significant Deficiency Yes AB
567340 2024-002 Significant Deficiency - AB
567341 2024-001 Significant Deficiency Yes AB
567342 2024-002 Significant Deficiency - AB
567343 2024-001 Significant Deficiency Yes AB
567344 2024-002 Significant Deficiency - AB
567345 2024-001 Significant Deficiency Yes AB
567346 2024-002 Significant Deficiency - AB
567347 2024-001 Significant Deficiency Yes AB
567348 2024-002 Significant Deficiency - AB
567349 2024-001 Significant Deficiency Yes AB
567350 2024-002 Significant Deficiency - AB
567351 2024-001 Significant Deficiency Yes AB
567352 2024-002 Significant Deficiency - AB
1143575 2024-001 Significant Deficiency Yes AB
1143576 2024-002 Significant Deficiency - AB
1143577 2024-001 Significant Deficiency Yes AB
1143578 2024-002 Significant Deficiency - AB
1143579 2024-001 Significant Deficiency Yes AB
1143580 2024-002 Significant Deficiency - AB
1143581 2024-001 Significant Deficiency Yes AB
1143582 2024-002 Significant Deficiency - AB
1143583 2024-001 Significant Deficiency Yes AB
1143584 2024-002 Significant Deficiency - AB
1143585 2024-001 Significant Deficiency Yes AB
1143586 2024-002 Significant Deficiency - AB
1143587 2024-001 Significant Deficiency Yes AB
1143588 2024-002 Significant Deficiency - AB
1143589 2024-001 Significant Deficiency Yes AB
1143590 2024-002 Significant Deficiency - AB
1143591 2024-001 Significant Deficiency Yes AB
1143592 2024-002 Significant Deficiency - AB
1143593 2024-001 Significant Deficiency Yes AB
1143594 2024-002 Significant Deficiency - AB
1143595 2024-001 Significant Deficiency Yes AB
1143596 2024-002 Significant Deficiency - AB
1143597 2024-001 Significant Deficiency Yes AB
1143598 2024-002 Significant Deficiency - AB
1143599 2024-001 Significant Deficiency Yes AB
1143600 2024-002 Significant Deficiency - AB
1143601 2024-001 Significant Deficiency Yes AB
1143602 2024-002 Significant Deficiency - AB
1143603 2024-001 Significant Deficiency Yes AB
1143604 2024-002 Significant Deficiency - AB
1143605 2024-001 Significant Deficiency Yes AB
1143606 2024-002 Significant Deficiency - AB
1143607 2024-001 Significant Deficiency Yes AB
1143608 2024-002 Significant Deficiency - AB
1143609 2024-001 Significant Deficiency Yes AB
1143610 2024-002 Significant Deficiency - AB
1143611 2024-001 Significant Deficiency Yes AB
1143612 2024-002 Significant Deficiency - AB
1143613 2024-001 Significant Deficiency Yes AB
1143614 2024-002 Significant Deficiency - AB
1143615 2024-001 Significant Deficiency Yes AB
1143616 2024-002 Significant Deficiency - AB
1143617 2024-001 Significant Deficiency Yes AB
1143618 2024-002 Significant Deficiency - AB
1143619 2024-001 Significant Deficiency Yes AB
1143620 2024-002 Significant Deficiency - AB
1143621 2024-001 Significant Deficiency Yes AB
1143622 2024-002 Significant Deficiency - AB
1143623 2024-001 Significant Deficiency Yes AB
1143624 2024-002 Significant Deficiency - AB
1143625 2024-001 Significant Deficiency Yes AB
1143626 2024-002 Significant Deficiency - AB
1143627 2024-001 Significant Deficiency Yes AB
1143628 2024-002 Significant Deficiency - AB
1143629 2024-001 Significant Deficiency Yes AB
1143630 2024-002 Significant Deficiency - AB
1143631 2024-001 Significant Deficiency Yes AB
1143632 2024-002 Significant Deficiency - AB
1143633 2024-001 Significant Deficiency Yes AB
1143634 2024-002 Significant Deficiency - AB
1143635 2024-001 Significant Deficiency Yes AB
1143636 2024-002 Significant Deficiency - AB
1143637 2024-001 Significant Deficiency Yes AB
1143638 2024-002 Significant Deficiency - AB
1143639 2024-001 Significant Deficiency Yes AB
1143640 2024-002 Significant Deficiency - AB
1143641 2024-001 Significant Deficiency Yes AB
1143642 2024-002 Significant Deficiency - AB
1143643 2024-001 Significant Deficiency Yes AB
1143644 2024-002 Significant Deficiency - AB
1143645 2024-001 Significant Deficiency Yes AB
1143646 2024-002 Significant Deficiency - AB
1143647 2024-001 Significant Deficiency Yes AB
1143648 2024-002 Significant Deficiency - AB
1143649 2024-001 Significant Deficiency Yes AB
1143650 2024-002 Significant Deficiency - AB
1143651 2024-001 Significant Deficiency Yes AB
1143652 2024-002 Significant Deficiency - AB
1143653 2024-001 Significant Deficiency Yes AB
1143654 2024-002 Significant Deficiency - AB
1143655 2024-001 Significant Deficiency Yes AB
1143656 2024-002 Significant Deficiency - AB
1143657 2024-001 Significant Deficiency Yes AB
1143658 2024-002 Significant Deficiency - AB
1143659 2024-001 Significant Deficiency Yes AB
1143660 2024-002 Significant Deficiency - AB
1143661 2024-001 Significant Deficiency Yes AB
1143662 2024-002 Significant Deficiency - AB
1143663 2024-001 Significant Deficiency Yes AB
1143664 2024-002 Significant Deficiency - AB
1143665 2024-001 Significant Deficiency Yes AB
1143666 2024-002 Significant Deficiency - AB
1143667 2024-001 Significant Deficiency Yes AB
1143668 2024-002 Significant Deficiency - AB
1143669 2024-001 Significant Deficiency Yes AB
1143670 2024-002 Significant Deficiency - AB
1143671 2024-001 Significant Deficiency Yes AB
1143672 2024-002 Significant Deficiency - AB
1143673 2024-001 Significant Deficiency Yes AB
1143674 2024-002 Significant Deficiency - AB
1143675 2024-001 Significant Deficiency Yes AB
1143676 2024-002 Significant Deficiency - AB
1143677 2024-001 Significant Deficiency Yes AB
1143678 2024-002 Significant Deficiency - AB
1143679 2024-001 Significant Deficiency Yes AB
1143680 2024-002 Significant Deficiency - AB
1143681 2024-001 Significant Deficiency Yes AB
1143682 2024-002 Significant Deficiency - AB
1143683 2024-001 Significant Deficiency Yes AB
1143684 2024-002 Significant Deficiency - AB
1143685 2024-001 Significant Deficiency Yes AB
1143686 2024-002 Significant Deficiency - AB
1143687 2024-001 Significant Deficiency Yes AB
1143688 2024-002 Significant Deficiency - AB
1143689 2024-001 Significant Deficiency Yes AB
1143690 2024-002 Significant Deficiency - AB
1143691 2024-001 Significant Deficiency Yes AB
1143692 2024-002 Significant Deficiency - AB
1143693 2024-001 Significant Deficiency Yes AB
1143694 2024-002 Significant Deficiency - AB
1143695 2024-001 Significant Deficiency Yes AB
1143696 2024-002 Significant Deficiency - AB
1143697 2024-001 Significant Deficiency Yes AB
1143698 2024-002 Significant Deficiency - AB
1143699 2024-001 Significant Deficiency Yes AB
1143700 2024-002 Significant Deficiency - AB
1143701 2024-001 Significant Deficiency Yes AB
1143702 2024-002 Significant Deficiency - AB
1143703 2024-001 Significant Deficiency Yes AB
1143704 2024-002 Significant Deficiency - AB
1143705 2024-001 Significant Deficiency Yes AB
1143706 2024-002 Significant Deficiency - AB
1143707 2024-001 Significant Deficiency Yes AB
1143708 2024-002 Significant Deficiency - AB
1143709 2024-001 Significant Deficiency Yes AB
1143710 2024-002 Significant Deficiency - AB
1143711 2024-001 Significant Deficiency Yes AB
1143712 2024-002 Significant Deficiency - AB
1143713 2024-001 Significant Deficiency Yes AB
1143714 2024-002 Significant Deficiency - AB
1143715 2024-001 Significant Deficiency Yes AB
1143716 2024-002 Significant Deficiency - AB
1143717 2024-001 Significant Deficiency Yes AB
1143718 2024-002 Significant Deficiency - AB
1143719 2024-001 Significant Deficiency Yes AB
1143720 2024-002 Significant Deficiency - AB
1143721 2024-001 Significant Deficiency Yes AB
1143722 2024-002 Significant Deficiency - AB
1143723 2024-001 Significant Deficiency Yes AB
1143724 2024-002 Significant Deficiency - AB
1143725 2024-001 Significant Deficiency Yes AB
1143726 2024-002 Significant Deficiency - AB
1143727 2024-001 Significant Deficiency Yes AB
1143728 2024-002 Significant Deficiency - AB
1143729 2024-001 Significant Deficiency Yes AB
1143730 2024-002 Significant Deficiency - AB
1143731 2024-001 Significant Deficiency Yes AB
1143732 2024-002 Significant Deficiency - AB
1143733 2024-001 Significant Deficiency Yes AB
1143734 2024-002 Significant Deficiency - AB
1143735 2024-001 Significant Deficiency Yes AB
1143736 2024-002 Significant Deficiency - AB
1143737 2024-001 Significant Deficiency Yes AB
1143738 2024-002 Significant Deficiency - AB
1143739 2024-001 Significant Deficiency Yes AB
1143740 2024-002 Significant Deficiency - AB
1143741 2024-001 Significant Deficiency Yes AB
1143742 2024-002 Significant Deficiency - AB
1143743 2024-001 Significant Deficiency Yes AB
1143744 2024-002 Significant Deficiency - AB
1143745 2024-001 Significant Deficiency Yes AB
1143746 2024-002 Significant Deficiency - AB
1143747 2024-001 Significant Deficiency Yes AB
1143748 2024-002 Significant Deficiency - AB
1143749 2024-001 Significant Deficiency Yes AB
1143750 2024-002 Significant Deficiency - AB
1143751 2024-001 Significant Deficiency Yes AB
1143752 2024-002 Significant Deficiency - AB
1143753 2024-001 Significant Deficiency Yes AB
1143754 2024-002 Significant Deficiency - AB
1143755 2024-001 Significant Deficiency Yes AB
1143756 2024-002 Significant Deficiency - AB
1143757 2024-001 Significant Deficiency Yes AB
1143758 2024-002 Significant Deficiency - AB
1143759 2024-001 Significant Deficiency Yes AB
1143760 2024-002 Significant Deficiency - AB
1143761 2024-001 Significant Deficiency Yes AB
1143762 2024-002 Significant Deficiency - AB
1143763 2024-001 Significant Deficiency Yes AB
1143764 2024-002 Significant Deficiency - AB
1143765 2024-001 Significant Deficiency Yes AB
1143766 2024-002 Significant Deficiency - AB
1143767 2024-001 Significant Deficiency Yes AB
1143768 2024-002 Significant Deficiency - AB
1143769 2024-001 Significant Deficiency Yes AB
1143770 2024-002 Significant Deficiency - AB
1143771 2024-001 Significant Deficiency Yes AB
1143772 2024-002 Significant Deficiency - AB
1143773 2024-001 Significant Deficiency Yes AB
1143774 2024-002 Significant Deficiency - AB
1143775 2024-001 Significant Deficiency Yes AB
1143776 2024-002 Significant Deficiency - AB
1143777 2024-001 Significant Deficiency Yes AB
1143778 2024-002 Significant Deficiency - AB
1143779 2024-001 Significant Deficiency Yes AB
1143780 2024-002 Significant Deficiency - AB
1143781 2024-001 Significant Deficiency Yes AB
1143782 2024-002 Significant Deficiency - AB
1143783 2024-001 Significant Deficiency Yes AB
1143784 2024-002 Significant Deficiency - AB
1143785 2024-001 Significant Deficiency Yes AB
1143786 2024-002 Significant Deficiency - AB
1143787 2024-001 Significant Deficiency Yes AB
1143788 2024-002 Significant Deficiency - AB
1143789 2024-001 Significant Deficiency Yes AB
1143790 2024-002 Significant Deficiency - AB
1143791 2024-001 Significant Deficiency Yes AB
1143792 2024-002 Significant Deficiency - AB
1143793 2024-001 Significant Deficiency Yes AB
1143794 2024-002 Significant Deficiency - AB

Programs

ALN Program Spent Major Findings
93.RD Department of Health and Human Services - Center for Disease Control $2.01M Yes 2
12.RD Department of Defense - Defense Technical Information Center $658,860 Yes 2
12.RD Department of Defense - National Reconnaissance Organization $636,717 Yes 2
12.RD Department of Defense - Defense Intelligence Agency $599,686 Yes 2
12.RD Department of Defense - Office of the Secretary of Defense $583,081 Yes 2
12.RD Department of Defense - Marines $83,729 Yes 2
12.RD Department of Defense - Navy $79,074 Yes 2
12.RD Department of Defense - Other Contracts $73,587 Yes 2
12.RD Department of Defense - Defense Advanced Research Projects Agency $70,787 Yes 2
66.RD Environmental Protection Agency $64,685 Yes 2
12.RD Department of Defense - Defense Logistics Agency $18,252 Yes 2
97.RD Department of Homeland Security $13,110 Yes 2
20.RD Department of Transportation $11,442 Yes 2
81.RD Department of Energy $9,814 Yes 2
12.RD Department of Defense - Army $3,299 Yes 2
12.RD Department of Defense - Defense Threat Reduction Agency $1,568 Yes 2
12.RD Department of Defense - Air Force $636 Yes 2
43.RD National Aeronautics and Space Administration $248 Yes 2
19.RD Department of State $109 Yes 2
12.RD Department of Defense - Washington Headquarters Services $55 Yes 2

Contacts

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

Notes to SEFA

Title: Basis of Presentation Accounting Policies: Expenditures reported on the Schedule of Expenditures of Federal Awards (the Schedule) are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Title 2 U.S. CFR Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), wherein certain types of expenditures are not allowable or are limited as to reimbursement. Any negative amounts shown in the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. De Minimis Rate Used: N Rate Explanation: Direct and indirect costs are charged to awards in accordance with cost principles contained in the Federal Acquisition Regulations (FAR) Part 31 and the Cost Accounting Standards. The Company recovers indirect costs under contracts and grants at provisional rates negotiated between itself and the cognizant agency (U.S. Department of Defense). Separate indirect cost rates are negotiated for fringe benefits, management overhead, facilities overhead, bid and proposal/independent research and development costs, general and administrative costs, material handling, subcontracting, and facilities capital cost of money (FCCOM). Final indirect costs for each fiscal year are determined by the Defense Contract Audit Agency (DCAA) upon subsequent annual audits at which point cost reimbursement contracts are settled at actual rates. A detailed schedule of indirect cost rates is included in the DCAA annual incurred cost report for the year ended September 30, 2024. The Company has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. The accompanying Schedule includes the federal award activity of SRC, Inc. and Subsidiaries (SRC or the Company) under programs of the federal government for the year ended September 30, 2024. The information in this Schedule is presented in accordance with the requirements of the Uniform Guidance. Because the Schedule presents only a selected portion of the operations of the Company, it is not intended to and does not present the financial position, changes in net assets or cash flows of the Company. All of the Company’s federal awards were in the form of cash assistance for the year ended September 30, 2024. The Company had no federally funded insurance programs or loan guarantees during the year ended September 30, 2024.
Title: Other Contracts Accounting Policies: Expenditures reported on the Schedule of Expenditures of Federal Awards (the Schedule) are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in Title 2 U.S. CFR Part 200, Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), wherein certain types of expenditures are not allowable or are limited as to reimbursement. Any negative amounts shown in the Schedule represent adjustments or credits made in the normal course of business to amounts reported as expenditures in prior years. De Minimis Rate Used: N Rate Explanation: Direct and indirect costs are charged to awards in accordance with cost principles contained in the Federal Acquisition Regulations (FAR) Part 31 and the Cost Accounting Standards. The Company recovers indirect costs under contracts and grants at provisional rates negotiated between itself and the cognizant agency (U.S. Department of Defense). Separate indirect cost rates are negotiated for fringe benefits, management overhead, facilities overhead, bid and proposal/independent research and development costs, general and administrative costs, material handling, subcontracting, and facilities capital cost of money (FCCOM). Final indirect costs for each fiscal year are determined by the Defense Contract Audit Agency (DCAA) upon subsequent annual audits at which point cost reimbursement contracts are settled at actual rates. A detailed schedule of indirect cost rates is included in the DCAA annual incurred cost report for the year ended September 30, 2024. The Company has elected not to use the 10 percent de minimis indirect cost rate allowed under the Uniform Guidance. Other contracts, referred to in the Schedule, primarily consist of federal contracts the Company has entered into that are of a sensitive nature which were subject to audit by a branch of the DCAA that monitors classified contracts.

Finding Details

Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
Finding 2024-001
2024-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2024. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 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.
Finding 2024-002
2024-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2024 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the review and approval of employee work arrangement requests. We performed an analysis to identify employees that are not following their specific work arrangement and to determine if there was a material impact on the onsite/offsite allocations. For all 54 employees reviewed, we took no exceptions for the onsite/offsite labor charges when compared to the contractor’s labor General Ledger (GL) detail. Therefore, we found no impact on the contractors onsite/offsite allocations. However, during our analysis we found 49 employees working under unapproved work arrangements during FY 2024. The employees submitted work arrangement requests in the contractor’s system and were found to be working the submitted work arrangement without supervisor approval. SRC’s Hours of Work and Work Arrangements Policy states: “Once approved by a supervisor, an employee can formally request remote work as a possible work arrangement by completing the work arrangement request. Approval is required by the supervisor with HR representative input for the WAR. All work arrangement requests must be reviewed prior to commencement and renewed upon changes to the previous request.” b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” c. Recommendation The auditee should comply with its formal policies and procedures and ensure the appropriate personnel are reviewing and approving the submitted employee work arrangements in the contractor’s system. d. Contractor Response SRC concurs to our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.