[Federal Register Volume 72, Number 100 (Thursday, May 24, 2007)]
[Rules and Regulations]
[Pages 29077-29081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-10037]
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DEPARTMENT OF ENERGY
48 CFR Part 970
RIN 1991-AB67
Acquisition Regulation: Implementation of DOE's Cooperative Audit
Strategy for Its Management and Operating Contracts
AGENCY: Department of Energy.
ACTION: Final rule.
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SUMMARY: The Department of Energy (DOE) is amending its Acquisition
Regulation (DEAR) by making minor amendments to existing contractor
internal audit requirements, through the use of the Cooperative Audit
Strategy.
DATES: Effective Date: June 25, 2007.
FOR FURTHER INFORMATION CONTACT: Helen Oxberger, U.S. Department of
Energy, MA-61, 1000 Independence Avenue, SW., Washington, DC 20585,
telephone (202) 287-1332 or submit electronically to
[email protected].
SUPPLEMENTARY INFORMATION:
I. Background
II. Discussion of Public Comments
III. Section-by-Section Analysis
IV. Procedural Requirements
A. Review Under Executive Order 12866
B. Review Under the Regulatory Flexibility Act
C. Review Under the Paperwork Reduction Act
D. Review Under the National Environmental Policy Act
E. Review Under Executive Order 13132
F. Review Under Executive Order 12988
G. Review Under the Unfunded Mandates Reform Act of 1995
H. Review Under the Treasury and General Government
Appropriations Act, 1999
I. Review Under the Treasury and General Government
Appropriations Act, 2001
J. Review Under Executive Order 13211
K. Review Under the Small Business Regulatory Enforcement
Fairness Act of 1996
L. Approval by the Office of the Secretary
I. Background
The Department contracts for the management and operation of its
Government-owned or -controlled research, development, special
production, or testing facilities through the use of management and
operating (M&O) contracts. The Department historically expends
approximately 73 percent of its annual appropriations through these M&O
prime contracts. Thus, it is imperative for the Department to develop
approaches which permit oversight of M&O contractor expenditures in
order for the Department to satisfy its oversight responsibility and to
ensure that DOE funds are expended on allowable costs.
The creation and maintenance of rigorous business, financial, and
accounting systems by contractors are crucial to assuring the integrity
and reliability of the cost data used by the DOE's Chief Financial
Officer (CFO), the Inspector General (IG), and contracting officers
(COs). To ensure the reliability of these systems, DOE requires some of
its contractors to maintain an internal
[[Page 29078]]
audit activity, that is, an internal audit organization that is
responsible for: (i) Performing operational and financial audits
including incurred cost audits, and (ii) assessing the adequacy of
management control systems.
The Cooperative Audit Strategy is a program that the IG, partnering
with contractors' internal audit groups, the CFO, and the Office of DOE
Procurement and Assistance Management, developed and implemented in
October 1992 to maximize the overall audit coverage of M&O contractors'
operations and to fulfill the IG's responsibility for auditing the
costs incurred by major facilities contractors. The Cooperative Audit
Strategy enhances DOE's efficient use of available audit resources by
allowing the IG to rely on the work of contractors' internal audit
organizations. The IG has adopted the Cooperative Audit Strategy at
most major DOE facilities operated by contractors.
The success of the Cooperative Audit Strategy depends on the IG and
contractor internal audit groups working closely with DOE. The
contractor internal audit groups are committed to a continuing
evaluation of the Cooperative Audit Strategy process and have
established the Steering Committee for Quality Auditing to address
current issues and implement on-going improvements.
DOE published a Notice of Proposed Rulemaking (NOPR) in the Federal
Register on May 8, 2006 (71 FR 26723). The NOPR proposed to amend two
Department of Energy Acquisition Regulation (DEAR) clauses to more
effectively implement DOE's Cooperative Audit Strategy. The proposed
changes would eliminate Alternate II of DEAR clause 970.5232-3, and
revise and expand the contract clause to require the use of the DOE's
Cooperative Audit Strategy in all M&O contracts. Currently, the
Cooperative Audit Strategy is implemented under an alternate clause
(Alternate II) in the Accounts, records, and inspection contract clause
at 970.5232-3. Because Alternate II is being deleted, DOE has deleted
the alternate prescription for the alternate at 970.3270 (a)(2)(ii).
In addition, the Department proposed to amend the DEAR clause
970.5203-1 entitled Management Controls by adding a sentence requiring
the contractor to submit audit reports.
Four commenters responded to our May 8, 2006 NOPR. All the comments
were directed toward the proposed Section 970.5232-3, paragraph (i)
Internal Audit and paragraph (j) Remedies. Section II of this preamble
presents a summary of the comments by subject, and the responses to the
comments.
II. Discussion of Public Comments
Comments on Internal Audit Requirements
Comment: Four commenters made remarks on paragraph (i) of proposed
Section 970.5232-3. One commenter stated that it believes paragraph (i)
requirements of the DEAR clause 970.5232-3 for submittal of three
reports related to the contractor's internal audit function amount to
DOE's significant involvement in the contractor's day-to-day internal
audit function operations.
That commenter believes that proposed paragraphs (i) (1), (i) (2),
and (i) (3) contradict the Cooperative Audit Strategy objectives and
may actually, per paragraph (i) (4), create a structure where the
contractors' internal audit function may appear to report to the DOE
contracting officer. The commenter argues that the proposed sections
would permit the contracting officer to make unilateral decisions on
the new requirements, the design plan for internal audits, the annual
report, and the annual internal audits, thereby making it difficult for
the contractor to manage and control the contractor's own assurance
system.
One commenter believes that the proposed paragraph (i) requirements
contradict an already existing clause in its contract with DOE, which
states that the National Nuclear Security Administration (NNSA) will
provide direction as to what NNSA wants and empowers the contractor to
determine how the program is executed with the contractor accountable
for its performance.
One commenter fully supports DOE's Cooperative Audit Strategy and
the Department's efforts to continue an effective and efficient
independent audit function at the M&O contractor facilities to ensure
that internal audits are conducted reliably.
Response: As stated in the proposed rule, this rule will be used
only in DOE's M&O contracts, involving annual reconciliation of
expenditures using the DOE's Statement of Cost Incurred and Claimed
(SCIC) process. The SCIC process is used in contracts involving well
over $1 billion dollars in annual expenditures by the covered
contractor. Those same contractors maintain a special bank account, for
reasons of benefit to DOE and the U.S. Treasury, under which those
contractors pay contractual obligations directly with DOE funds. The
SCIC process would be meaningless without a systematic process to
assess the adequacy of the contractor's system of financial controls.
It is imperative for DOE to maintain processes which permit oversight
of M&O contractor expenditures in order for DOE to accomplish its
oversight responsibilities and to require the contractor to have an
independent audit function capable of auditing the contractor's system
of the financial controls needed to assure the proper use of the funds.
The purpose of the reports prescribed in paragraph (i) of the
clause is to provide DOE's CFO, IG, and COs with confidence in the
contractor's system of financial controls. DOE currently receives
annual reports and annual plans from the DOE M&O contractor for two of
the three required crucial reports. The third report, specified by the
final rule as a requirement of the Internal Audit Implementation Plan,
is critical to the Government's assurance and confidence in the M&O
contractor's financial controls system. By providing the Internal Audit
Implementation Plan, the M&O contractor will provide DOE with
information about the operation of the contractor's internal audit
function, which is important in establishing DOE's ability to rely on
the contractor's internal audit organization to perform operational and
financial audits, including incurred cost audits, and assessing the
adequacy of the contractor's management control systems.
Current policy already exists for contracting officers to be
empowered and operate under statutory mandates permitting them to make
unilateral decisions, such as a reasonableness determination that is a
common practice in Federal contract administration. The contracting
officers must have the flexibility, as compelled by their authority, to
make prudent decisions that are fair, reasonable and supportable.
DOE believes that this rule provides the necessary framework for a
systematic process for use by its M&O contractors in the organization
and operation of their internal audit function. The Government needs
reasonable assurance that the contractor has an effective internal
control structure for accountability and control over its funds. The
Government also needs reasonable assurance that the contractor is
complying with Federal laws and regulations and the terms and
conditions of the contract related to the use of funds. The changes
made by this final rule will maximize the overall audit coverage of the
contractor's operations and fulfill the IG's responsibility for
auditing the costs
[[Page 29079]]
incurred by all M&O contractors. The changes made by the final rule
will better ensure DOE's efficient use of available audit resources by
allowing the IG to rely on the work of the M&O contractor's internal
audit organization.
One commenter separately made a comment relating to contract
provisions it specifically negotiated and Chapter 70.4 of the
Acquisition Guide, respectively. This comment is outside the scope of
this rule.
Comments on Remedies Requirements
Comment: Three commenters made comments opposing the stated
remedies of paragraph (j) of proposed Sec. 970.5232-3. That paragraph
would allow the DOE contracting officer unilaterally to suspend or
revoke, in whole or in part, access to the Special Banking Financial
Institution Accounts. The commenters asserted that the affected
contractors would be subjected to greater risk, without any
commensurate increase in associated fee, under such a contract. The
commenters also stated that if the M&O contractor's use of the special
financial institution account is revoked, there are no criteria for
providing alternative compensation to the contractor for use of its
working capital. Finally, the commenters contend there is no
requirement for the use of this special financial institution account
to be restored without undue delay.
One commenter stated that paragraph (j) of the proposed Sec.
970.5232-3 is not consistent with Federal acquisition policy, as
expressed in the Federal Acquisition Regulation (FAR) 31.201-2
Determining allowability.
Response: DOE disagrees and has not altered the final rule in
response to the comments relating to paragraph (j). As explained in the
preamble of the proposed rule (71 FR at 26724), DOE is amending two
DEAR clauses to more effectively implement DOE's Cooperative Audit
Strategy. These changes provide DOE insight into the use of the M&O
contractor's SCIC for reconciliation of allowable costs, thus enhancing
DOE's confidence in the integrity of its financial control systems. DOE
proposed paragraph (j) to expressly include risk mitigation of the
special financial institution accounts. The existing system of payment
to the DOE's M&O contractor under the Cooperative Audit Strategy relies
heavily on the contractor's internal audit function and system of
financial controls. That reliance introduces risks. DOE believes that
if a DOE contracting officer reasonably loses confidence in an M&O
contractor's financial system of controls, he or she must be able to
react immediately to prevent additional expenditures under the special
bank account. This authority would be used only as a last resort. The
contracting officer's authority to stop payment of funds is not new and
he or she must have the ability to restrict access to the funds as a
prescribed remedy in dealing with a failure of financial controls. This
is a contract financial control issue, not a cost allowability issue.
We believe the express statement of these remedies in paragraph (j)
will enhance DOE's fulfillment of its fiduciary responsibility by
minimizing risk to the Government as a result of a failure of the
contractor's financial control system that could impact the SCIC and
special bank accounts.
Revisions Incorporated Into This Final Rule
Comment: One commenter agrees with the proposal to use outside
auditors to perform peer reviews of the work of a contractor's internal
audit organization. The commenter stated that it would solicit the
``concurrence of the DOE Contracting Officer before engaging any
outside audit firm.'' The commenter believes that a review performed by
such a third party would be no less effective, and perhaps more
independent, than a review conducted by another M&O contractor's
internal audit organization. The commenter fully supports the
Cooperative Audit Strategy but suggests revising the language in
paragraph (i) (viii) of proposed section 970.5232-3, regarding the
Internal Audit Implementation Design, to permit the use of an
independent audit organization approved by DOE.
Response: We have adopted the comment and expanded the language to
read:
``The schedule for peer review of internal audits by other
contractor internal audit organizations, or other independent third
party audit entities approved by the DOE Contracting Officer.''
III. Section-by-Section Analysis
DOE is amending the DEAR as follows:
1. Section 970.3270, Standard financial management clause, is
amended by deleting the designator ``i'' from paragraph (a)(2)(i) and
deleting paragraph (a)(2)(ii).
2. Section 970.5203-1, Management controls, paragraph (a)(4) is
amended by adding a sentence which requires the contractor to annually,
or at other times as directed by the contracting officer, provide
copies of reports on the status of audit recommendations.
3. Section 970.5232-3, Accounts, records, and inspection, is
amended by deleting Alternate II and by adding new paragraphs (i) and
(j).
IV. Procedural Requirements
A. Review Under Executive Order 12866
This regulatory action has been determined not to be a significant
regulatory action under Executive Order 12866, Regulatory Planning and
Review (58 FR 51735, October 4, 1993). Accordingly, this action is not
subject to review under the Executive Order by the Office of
Information and Regulatory Affairs (OIRA) within the Office of
Management and Budget.
B. Review Under the Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires
preparation of an initial regulatory flexibility analysis for any rule
that by law must be proposed for public comment, unless the agency
certifies that the rule, if promulgated, will not have a significant
economic impact on a substantial number of small entities. As required
by Executive Order 13272, ``Proper Consideration of Small Entities in
Agency Rulemaking'' (67 FR 53461, August 16, 2002), DOE published
procedures and policies to ensure that the potential impacts of its
draft rules on small entities are properly considered during the
rulemaking process (68 FR 7990, February 19, 2003), and has made them
available on the Office of General Counsel's Web site: http://www.gc.doe.gov. DOE has reviewed today's final rule under the
provisions of the Regulatory Flexibility Act and the procedures and
policies published on February 19, 2003. The final rule would amend
procurement policies that apply only to DOE M&O contracts and would
impact only DOE's M&O contractors, none of whom are small entities.
This rule would not have a significant economic impact on small
entities. On the basis of the foregoing, DOE certifies that the final
rule, if promulgated, would not have a significant economic impact on a
substantial number of small entities. Accordingly, DOE has not prepared
a regulatory flexibility analysis for this rulemaking.
C. Review Under the Paperwork Reduction Act
Existing burdens associated with the collection of certain
contractor audit data have been previously cleared under OMB control
number 1910-4100, which expires on April 30, 2008. The Department has
concluded that the additional information collection burden resulting
from this regulatory
[[Page 29080]]
action would apply to less than ten persons in any 12-month period and
therefore is less than the threshold for submission to the Office of
Management and Budget (OMB) under 5 CFR 1320.3(c). Therefore, DOE has
not submitted this action to OMB.
D. Review Under the National Environmental Policy Act
DOE has concluded that promulgation of this final rule falls into a
class of actions that would not individually or cumulatively have a
significant impact on the human environment, as determined by DOE's
regulations implementing the National Environmental Policy Act of 1969
(42 U.S.C. 4321 et seq.). Specifically, this final rule deals only with
agency procedures, and therefore, is covered under the Categorical
Exclusion in paragraph A6 of Appendix A to Subpart D, 10 CFR part 1021.
Accordingly, neither an environmental assessment nor an environmental
impact statement is required.
E. Review Under Executive Order 13132
Executive Order 13132, ``Federalism'' (64 FR 43255, August 4, 1999)
imposes certain requirements on agencies formulating and implementing
policies or regulations that preempt State law or that have federalism
implications. Agencies are required to examine the constitutional and
statutory authority supporting any action that would limit the
policymaking discretion of the States and carefully assess the
necessity for such actions. The Executive Order also requires agencies
to have an accountability process to ensure meaningful and timely input
by State and local officials in the development of regulatory policies
that have federalism implications. On March 14, 2000, DOE published a
statement of policy describing the intergovernmental consultation
process it will follow in the development of such regulations (65 FR
13735). DOE has examined today's rule and has determined that it does
not preempt State law and does not have a substantial direct effect on
the States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government. No further action is required by
Executive Order 13132.
F. Review Under Executive Order 12988
With respect to the review of existing regulations and the
promulgation of new regulations, section 3(a) of Executive Order 12988,
``Civil Justice Reform'' (61 FR 4729, February 7, 1996), imposes on
Federal agencies the general duty to adhere to the following
requirements: (1) Eliminate drafting errors and ambiguity; (2) write
regulations to minimize litigation; and (3) provide a clear legal
standard for affected conduct rather than a general standard and
promote simplification and burden reduction. Section 3(b) of Executive
Order 12988 specifically requires that Executive agencies make every
reasonable effort to ensure that the regulation: (1) Clearly specifies
the preemptive effect, if any; (2) clearly specifies any effect on
existing Federal law or regulation; (3) provides a clear legal standard
for affected conduct while promoting simplification and burden
reduction; (4) specifies the retroactive effect, if any; (5) adequately
defines key terms; and (6) addresses other important issues affecting
clarity and general draftsmanship under any guidelines issued by the
Attorney General. Section 3(c) of Executive Order 12988 requires
Executive agencies to review regulations in light of applicable
standards in section 3(a) and section 3(b) to determine whether they
are met or it is unreasonable to meet one or more of them. DOE has
completed the required review and determined that, to the extent
permitted by law, this final rule meets the relevant standards of
Executive Order 12988.
G. Review Under the Unfunded Mandates Reform Act of 1995
Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) requires each Federal agency to assess the effects of a Federal
regulatory action on State, local, and tribal governments, and the
private sector. The Department has determined that today's regulatory
action does not impose a Federal mandate on State, local or tribal
governments or on the private sector.
H. Review Under the Treasury and General Government Appropriations Act,
1999
Section 654 of the Treasury and General Government Appropriations
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family
Policymaking Assessment for any rule that may affect family well-being.
This final rule would not have any impact on the autonomy or integrity
of the family as an institution. Accordingly, DOE has concluded that it
is not necessary to prepare a Family Policymaking Assessment.
I. Review Under the Treasury and General Government Appropriations Act,
2001
The Treasury and General Government Appropriations Act, 2001 (44
U.S.C. 3516, note) provides for agencies to review most disseminations
of information to the public under guidelines established by each
agency pursuant to general guideline issued by OMB. OMB's guidelines
were published at 67 FR 8452 (February 22, 2002), and DOE's guidelines
were published at 67 FR 62446 (October 7, 2002). DOE has reviewed
today's notice under the OMB and DOE guidelines and has concluded that
it is consistent with applicable policies in those guidelines.
J. Review Under Executive Order 13211
Executive Order 13211, ``Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR
28355, May 22, 2001), requires Federal agencies to prepare and submit
to the Office of Information and Regulatory Affairs (OIRA), Office of
Management and Budget, a Statement of Energy Effects for any proposed
significant energy action. A ``significant energy action'' is defined
as any action by an agency that promulgated or is expected to lead to
promulgation of a final rule, and that: (1) Is a significant regulatory
action under Executive Order 12866, or any successor order; and (2) is
likely to have a significant adverse effect on the supply,
distribution, or use of energy, or (3) is designated by the
Administrator of OIRA as a significant energy action. For any
significant energy action, the agency must give a detailed statement of
any adverse effects on energy supply, distribution, or use should the
proposal be implemented, and of reasonable alternatives to the action
and their expected benefits on energy supply, distribution, and use.
Today's regulatory action is not a significant energy action.
Accordingly, DOE has not prepared a Statement of Energy Effects.
K. Review Under the Small Business Regulatory Enforcement Fairness Act
of 1996
As required by 5 U.S.C. 801, DOE will report to Congress
promulgation of this rule prior to its effective date. The report will
state that it has been determined that the rule is not a ``major rule''
as defined by 5 U.S.C. 804(2).
L. Approval by the Office of the Secretary
The Office of the Secretary of Energy has approved issuance of this
rule.
List of Subjects in 48 CFR Part 970
Government procurement.
[[Page 29081]]
Issued in Washington, DC, on May 17, 2007.
Edward R. Simpson,
Director, Office of Procurement and Assistance Management, Department
of Energy.
David O. Boyd,
Director, Office of Acquisition and Supply Management, National Nuclear
Security Administration.
0
For the reasons stated in the preamble, chapter 9 of title 48 of the
Code of Federal Regulations is amended as set forth below:
PART 970--DOE MANAGEMENT AND OPERATING CONTRACTS
0
1. The authority citation for part 970 continues to read as follows:
Authority: 42 U.S.C. 2201, 2282a, 2282b, 2282c; 42 U.S.C. 7101
et seq.; 41 U.S.C. 418b; 50 U.S.C. 2401 et seq.
970.3270 [Amended]
0
2. Section 970.3270 is amended by removing the paragragh designation
``(i)'' from paragraph (a)(2)(i) and removing paragraph (a)(2)(ii).
0
3. Section 970.5203-1 is amended by adding a sentence to the end of
paragraph (a)(4).
970.5203-1 Management controls.
* * * * *
(a) * * *
(4) * * * Annually, or at other intervals directed by the
contracting officer, the contractor shall supply to the contracting
officer copies of the reports reflecting the status of recommendations
resulting from management audits performed by its internal audit
activity and any other audit organization. This requirement may be
satisfied in part by the reports required under paragraph (i) of
970.5232-3, Accounts, records, and inspection.
* * * * *
0
4. Section 970.5232-3 is amended by:
0
a. Revising the date of the clause;
0
b. Adding new paragraph (i) and (j) before the ``(End of clause)''; and
0
c. Removing Alternate II (including paragraph (i)).
The additions and revisions, read as follows:
970.5232-3 Accounts, records, and inspection.
* * *
Accounts, Records, and Inspection (JUNE 2007)
* * * * *
(i) Internal audit. The contractor agrees to design and maintain an
internal audit plan and an internal audit organization.
(1) Upon contract award, the exercise of any contract option, or
the extension of the contract, the contractor must submit to the
contracting officer for approval an Internal Audit Implementation
Design to include the overall strategy for internal audits. The Audit
Implementation Design must describe:
(i) The internal audit organization's placement within the
contractor's organization and its reporting requirements;
(ii) The audit organization's size and the experience and
educational standards of its staff;
(iii) The audit organization's relationship to the corporate
entities of the contractor;
(iv) The standards to be used in conducting the internal audits;
(v) The overall internal audit strategy of this contract,
considering particularly the method of auditing costs incurred in the
performance of the contract;
(vi) The intended use of external audit resources;
(vii) The plan for audit of subcontracts, both pre-award and post-
award; and
(viii) The schedule for peer review of internal audits by other
contractor internal audit organizations, or other independent third
party audit entities approved by the DOE contracting officer.
(2) By each January 31 of the contract performance period, the
contractor must submit an annual audit report, providing a summary of
the audit activities undertaken during the previous fiscal year. That
report shall reflect the results of the internal audits during the
previous fiscal year and the actions to be taken to resolve weaknesses
identified in the contractor's system of business, financial, or
management controls.
(3) By each June 30 of the contract performance period, the
contractor must submit to the contracting officer an annual audit plan
for the activities to be undertaken by the internal audit organization
during the next fiscal year that is designed to test the costs incurred
and contractor management systems described in the internal audit
design.
(4) The contracting officer may require revisions to documents
submitted under paragraphs (i)(1), (i)(2), and (i)(3) of this clause,
including the design plan for the internal audits, the annual report,
and the annual internal audits.
(j) Remedies. If at any time during contract performance, the
contracting officer determines that unallowable costs were claimed by
the contractor to the extent of making the contractor's management
controls suspect, or the contractor's management systems that validate
costs incurred and claimed suspect, the contracting officer may, in his
or her sole discretion, require the contractor to cease using the
special financial institution account in whole or with regard to
specified accounts, requiring reimbursable costs to be claimed by
periodic vouchering. In addition, the contracting officer, where he or
she deems it appropriate, may: Impose a penalty under 970.5242-1,
Penalties for unallowable costs; require a refund; reduce the
contractor's otherwise earned fee; and take such other action as
authorized in law, regulation, or this contract.
(End of Clause)
* * *
[FR Doc. E7-10037 Filed 5-23-07; 8:45 am]
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