Contract Management:

DOD Could Benefit From the Use of Internal Recovery Auditing

NSIAD-00-66R: Published: Mar 10, 2000. Publicly Released: Mar 10, 2000.

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Jack L. Brock, Jr
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GAO provided information on the Department of Defense's (DOD) internal recovery auditing program.

GAO noted that: (1) the Fiscal Year (FY) 1996 National Defense Authorization Act required the Secretary of Defense to conduct a demonstration program to evaluate the feasibility of using private contractors to identify overpayments the Department of Defense (DOD) has made to vendors; (2) the program began in September 1996, when the Defense Supply Center, Philadelphia, competitively contracted with Profit Recovery Group International (PRGI); (3) section 388 of the FY 1998 National Defense Authorization Act authorized continuation and expansion of the program; (4) in December 1998, GAO reported that the concept of recovery auditing offers potential to identify and recover overpayments through both internal DOD and external contractor efforts and recommended that DOD look into the cost-effectiveness of making moderate internal efforts to recover overpayments before awarding contracts for such efforts; (5) although DOD concurred with GAO's recommendation, officials from the Defense Finance and Accounting Service recently stated that they did not have the resources to do internal audits and planned no action to implement GAO's recommendation; (6) one of PRGI's steps in identifying overpayments was to ask, by letter, that vendors provide statements of their accounts with the government; (7) this technique led to the recovery of $957,000 from one vendor; (8) vendors identified another $1.75 million in overpayments that were outside the scope of the PRGI contract, either because they were not within the contractual review period or were related to another government agency; (9) in its December 1998 report, GAO concluded that DOD could take a number of steps to improve its use of recovery auditing, particularly as it considers using the concept at other DOD activities; (10) GAO learned that Wal-Mart stores and the Army and the Air Force Exchange Service perform internal recovery audits before contracting with an external group; (11) they obtain recoveries on the most easily identified claims, while external groups concentrate on more complex claims; (12) last year, the Exchange Service recovered $7.8 million through internal recovery auditing; (13) DOD is expanding its use of recovery auditing; (14) in June 1999, the U.S. Transportation Command contracted for recovery auditing services; (15) and in September 1999, the Defense Logistics Agency awarded contracts for recovery audits at four supply centers; and (16) GAO believes that the Defense Contract Audit Agency is uniquely suited to perform internal recovery audits at other DOD activities and through them potentially recover millions of dollars in overpayments to vendors.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: The DOD Comptroller, in a letter dated August 8, 2000, informed us that they performed an analysis of assigning DCAA with audit recovery responsibility and determined that DCAA should not have a role in recovery auditing.

    Recommendation: The Secretary of Defense should direct the Director of the Defense Contract Audit Agency to offer internal recovery auditing services to Department of Defense activities.

    Agency Affected: Department of Defense


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