Accounting error led Defense agency to outsource jobs

A $31.8 million accounting error overlooked by auditors in the Defense Department's Office of the Inspector General resulted in the outsourcing of about 650 federal jobs and could lead to a new competition for the work.

Errors in earlier audits of an A-76 competition of the military retired and annuitant pay functions in the Defense Finance and Accounting Service (DFAS) led agency officials to award a multimillion contract to ACS Government Services Inc., according to an audit released Thursday by Defense IG Joseph Schmitz. The error caused the in-house government bid to be higher than the contractor's bid.

"The correct EPA [economic price adjustment] determination may have changed the outcome of the cost comparison decision and retained the military retired and annuitant pay functions in-house," the March 21 audit said.

About 650 positions at DFAS Cleveland and DFAS Denver were affected by the competition. These two centers processed about $2.6 billion per month in payments for 2.5 million military retirees and annuitants. The American Federation of Government Employees (AFGE) appealed the initial award decision, but on Sept. 5, 2001, ACS was awarded a contract potentially worth $346 million. The contract, which included a four-month transition period that ended in January 2002, is renewable annually for 10 years.

In August 2001, Rep. Dennis Kucinich, D-Ohio, raised concerns about errors in the competition process and auditors in the Defense IG's office agreed to investigate his claims. Three months later, the Defense IG declared that the A-76 process had not been circumvented. In response, Kucinich asked the IG to review other issues and the subsequent review again verified that the in-house bid was accurate.

Defense IG staffers in March 2002 discovered an error in the in-house bid totaling $31.8 million that earlier auditors had not detected. Subsequent investigations revealed flaws in the auditing process, and Schmitz eventually asked the General Services Administration inspector general to review the issue. GSA's IG found that the Pentagon IG's deficient auditing process increased the chances of the error being overlooked.

"As the IG put it, this is 'shoddy internal audit work. It's an oversight failure.'" Sen. Charles Grassley, R-Iowa, said Thursday when the new audit was released. "I find the IG's self-criticism so encouraging and so refreshing. In the dark ages, before Mr. Joe Schmitz became IG, this problem would have been swept under the rug. It would have never seen the light of day. I guarantee it," he said.

In response to the error, Schmitz asked DFAS officials to review the situation and to justify why there should not be a re-competition for those services. The IG also retracted the earlier audits and issued a policy memo on March 20, prohibiting IG staffers from auditing, inspecting or investigating their own work.

Grassley applauded Schmitz's candor, but called for a wholesale overhaul of the Defense IG's office.

"By exposing this audit failure in such an open and honest way, the IG is taking a giant step forward," Grassley said. "The next step is a top-to-bottom housecleaning of his audit department. With the ineffective audit capability that exists today, the IG can't be a good watchdog of the taxpayers' money."

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