07/14/2012 05:02 pm ET | Updated Sep 13, 2012

Contracting Oversight: A Long Way to Go

Reconstruction was a key part of the effort to bring stability to Iraq after the removal of Saddam Hussein's regime in Iraq. But there were serious weaknesses in the government's controls over Iraq reconstruction funds that put billions of American taxpayer dollars at risk of waste and misappropriation, according to a just released report from the Special inspector General for Iraq Reconstruction (SIGIR).

The report, Final Forensic Audit Report of Iraq Reconstruction Funds, said the precise amount lost to fraud and waste can never be known, but believes it is significant. "As of June 30, 2012, SIGIR audit reports had questioned $635.8 million in costs, and SIGIR Investigations, working with other agencies, had resulted in $176.84 million in fines, forfeitures, and other monetary results."

Private contractors were a key part of reconstruction efforts in Iraq and a part of the problem. The fault was both with contractors themselves as well as poor oversight on the part of the government.

Problems included internal control weaknesses such as inadequate reviews of contractors' invoices, insufficient numbers of, or inadequately trained oversight staff, poor inventory controls, high staff turnover, poor recordkeeping, insufficient price competition by subcontractors, and weak oversight of cash disbursements.

For example, SIGIR's audit of a DoS contract for Iraqi police training program support found that more than $2.5 billion in U.S. funds was vulnerable to fraud and waste as a result of poor DoS oversight. Another SIGIR audit of a DoD contract for warehousing and distribution services found that the contractor's business systems had not been adequately reviewed. Business system reviews are the government's primary control to ensure that prices paid are reasonable and allowable.

The SIGIR report is sad confirmation of what people who follow contracting have long known; namely, that despite many years of effort to improve both the number and quality of government contracting officers, governmental oversight still badly lags behind the volume of government contracts to be monitored. The SIGIR report stated that:

We found numerous instances where U.S. government employees or their designated representatives had not thoroughly reviewed contractors' invoices before payment to ensure the bills were correct or appropriate. In some instances, invoices were reviewed months after they were paid. Poor and/or delayed invoice reviews add risk that the government may overpay, or pay unallowable and unreasonable costs. The following examples illustrate weak reviews of contractors' invoices.

For example, with respect to the DynCorp Contract for Support of the Iraqi Police Training Program, SIGIR reported back in 2010 that the State Department's Bureau of International Narcotics and Law Enforcement Affairs (INL) had only one contracting officer representative (COR) in Iraq validating invoices for task orders with expenditures that exceeded $2.5 billion.

As a result, invoices were not properly reviewed, and the $2.5 billion in U.S. funds were vulnerable to fraud and waste. We found this lack of control to be especially disturbing since earlier reviews of the DynCorp contract had found similar weaknesses. As a result of SIGIR's audits, INL began reconciling all historical invoices and, as of July 2009, reported that it had recovered more than $60 million and had additional collections in process.

An audit of the U.S. Army's Global Maintenance and Supply Services contract with AECOM to provide maintenance activities for the U.S. Army, Iraqi Army, and Afghan Army found that the U.S. Army Contracting Command performed inadequate invoice reviews. SIGIR's review of selected contract invoices showed AECOM potentially overbilled or could not support more than $4.2 million in costs, or 14% of the $30.6 million SIGIR examined.

An audit of Anham, LLC's contract for warehouse and distribution services showed that U.S. government personnel either did not review, or only conducted limited reviews of Anham's vouchers. At the time of SIGIR's review, $113.4 million in expenses had been incurred under the contract. But the administrative contracting office reviewed only $32.7 million in vouchers, and CORs [Contracting Officer Representatives] reviewed another $32.2 million in vouchers for trucking services.

But the CORs did not compare vouchers to receiving documents, signed for delivery of goods without verifying that the goods were delivered, and allowed Anham employees to sign for receipt of $10 million in goods. Moreover, Anham did not submit $44.7 million in vouchers for warehousing and delivered items to the administrative contracting office, and thus these were not reviewed.

Furthermore the audit also found that the Defense Contract Audit Agency had not completed a review of Anham's incurred costs and that, in general, it had a significant backlog in conducting these reviews. Because of these delays Anham's unreasonable charges for items purchased under the contract (such as an $80 PVC elbow that a competitor was selling for $1.41), could go undetected until such time when the government conducts these reviews.