Prior to October 2004, Energy  administered Subtitle D to help its contractors’ employees file state  workers’ compensation claims for illnesses determined by a panel of  physicians to have been caused by exposure to toxic substances in the  course of employment at an Energy facility. Energy Did Not Establish Effective Controls over Payments to Contractors or Overall Contract Costs

Energy’s control environment and specific internal control activities over  payments to contractors and overall contract costs were not effective in  reducing the risk of improper payments. Energy did not establish an  effective review and approval process for contractor invoices that enabled  it to verify that goods and services billed had actually been received and  charged at the agreed-upon amounts. Further,  accountability for equipment purchased and reimbursed by Energy for the  program by contractors was not maintained. Nearly $15 million of $92 million in  OWA program costs were incurred by subcontractors. We also identified $778,613 in improper and  questionable payments for other direct costs, including amounts for add- ons and base fees, and certain travel and related costs. Further, we  questioned whether certain other payments toward the end of the program  for furniture and computer equipment, totaling nearly $1.2 million, were an  efficient use of government funds. Given Energy’s poor control  environment and the fact that we only reviewed selected Energy payments,  other improper and questionable payments may have been made that have  not been identified. SEA billed approximately $970,930 under labor categories that did not  reflect actual duties performed. This  practice resulted in over $4 million in “markups” on subcontracted labor  charges that were paid by Energy. Conclusion

The questionable and improper payments we identified during our review  represent nearly 30 percent of total program funds spent through  September 30, 2005. In light of the findings in this report, we recommend that the Commanding  Officer,  Space and Naval Warfare Systems Center, New Orleans, reassess  the organization’s procedures for carrying out its delegated responsibilities  in connection with interagency agreements for delegated contract  administration responsibilities, including the following:  Assess the adequacy of the review and approval process for contractor  invoices, including (1) oversight and monitoring of contractor services  and linkage of these activities to the invoice review and approval  process, (2) verification that labor hours are billed in the appropriate  categories at the appropriate rates, and (3) determining that contractor  travel and other direct costs are in accordance with the contract and  applicable federal regulations. To determine whether Energy’s internal controls provided reasonable  assurance that improper payments to contractors would not be made or  would be detected in the normal course of business, we used Standards for  Internal Control in the Federal Government as a basis to assess the  internal control structure—control environment, risk assessment  procedures, control activities, information and communications, and  monitoring efforts of Energy over its OWA program. The scope of our work was to  determine whether internal controls over program payments were  adequately designed, and if program payments were properly  supported as a valid use of government funds.
Why GAO Did This Study

The Energy Employees Occupational Illness Compensation Program Act of 2000 (EEOICPA) authorized the Department of Energy (Energy) to help its former contractor employees file state workers' compensation claims for illnesses that could be linked to exposure to toxic substances during their employment. Concerned with the relatively small number of finalized cases and the overall effectiveness of the program, Congress asked GAO to review costs incurred by Energy to administer the program. Specifically, Congress asked GAO to determine whether (1) internal controls over program payments were adequately designed to provide reasonable assurance that improper payments to contractors would not be made or would be detected in the normal course of business and (2) program payments were properly supported as a valid use of government funds.

What GAO Found

Energy did not establish an effective control environment over payments to contractors or overall contract costs. Specifically, because Energy lacked an effective review and approval process for contractor invoices, it had no assurance that goods and services billed had actually been received. Although responsibility for review and approval of invoices on the largest contract rested with the Space and Naval Warfare Systems Center, New Orleans (SSC NOLA) through an interagency agreement, Energy did not ensure that SSC NOLA carried out proper oversight. Energy also failed to maintain accountability for equipment purchased by contractors. Further, subcontractor agreements, which represented nearly $15 million in program charges, were not adequately assessed, nor were overall contract costs sufficiently monitored or properly reported. These fundamental control weaknesses made Energy highly vulnerable to improper payments. GAO identified $26.4 million in improper and questionable payments for contractor costs, including billings of employees in labor categories for which they were not qualified or that did not reflect the duties they actually performed, the inappropriate use of fully burdened labor rates for subcontracted labor, add-on charges to other direct costs and base fees that were not in accordance with contract terms, and various other direct costs that were improperly paid. Further, certain payments toward the end of the program for furniture and computer equipment may not have been an efficient use of government funds. These improper and questionable payments represent nearly 30 percent of the $92 million in total program funds spent through September 30, 2005, but could be even higher given the poor control environment and the fact that GAO only reviewed selected program payments.