FOR IMMEDIATE RELEASE
UC releases independent review team findings
An External Review Team brought in by the University of California to independently investigate procurement practices at Los Alamos National Laboratory (LANL) has identified various internal control weaknesses and deficiencies that increased the Lab’s vulnerability to fraud, waste and abuse.
In the report publicly issued today (Apr. 10), the team, chaired by former Department of Energy Inspector General John Layton and assisted by forensic accountants from PricewaterhouseCoopers LLP, recommended a number of corrective actions to Los Alamos’ procurement practices, in addition to those already implemented by the University of California and the Laboratory. These combined actions, wrote Layton, “should provide an enhanced control environment for the Procurement Program.”
“This report underscores the need for fundamental reform of the way business is conducted at Los Alamos National Laboratory and confirms the need for many of the steps we have already taken,” said UC senior vice president of university affairs Bruce B. Darling, the interim vice president for laboratory management. “We are particularly troubled by the unusually high volume of purchases of such items as hand lotion, jackets and shoes. We have instructed the Laboratory to re-examine each of these purchases to determine whether they can be justified under the new policies and procedures that have been established.”
Darling emphasized that correcting all control problems and other procurement practice deficiencies are a top priority for the University and the Laboratory. “We believe that these actions, taken together with steps we have already taken, will give American taxpayers greater assurance that their tax dollars will be better managed at Los Alamos National Laboratory,” he said.
“The weaknesses – insufficient policies and procedures, lack of timely and reliable data and inadequate management – are being rapidly addressed by a complete re-engineering of the Laboratory's business processes,” said Los Alamos National Laboratory Interim Director George P. (Pete) Nanos. ”Just as immediate steps were taken when irregularities in the purchase card system were first identified to implement needed controls and accountability, we also have taken steps to address deficiencies in the Just-in-Time and Local Vendor Agreements processes. They are among more than 92 measurable milestones, with 514 assigned and accountable activities - that are part of the laboratory's overall Business Improvement Project Plan.”
The focus of the External Review Team review was the 24-month period ending September 30, 2002, during which there was $2.26 billion in procurement activity. In addition to a thorough review of policies and procedures and interviews with 63 individual employees, the team performed extensive analysis including data mining techniques deploying key word searches and criteria queries.
In issuing its report, the team identified $14,530 in potentially inappropriate transactions, specifically of outerwear apparel, which the University has brought to the attention of the Department of Energy Office of Inspector General. In addition, five lists of transactions have been submitted to Los Alamos management for additional documentation and review.
Darling said that, as with other costs incurred as part of the University’s effort to improve business and management problems at Los Alamos, any transactions that are inappropriate or unallowable will not be charged to the Department of Energy. That includes the cost of the external review itself.
The review covered the range of Laboratory procurement activity, including Purchase Orders and such streamlined purchasing techniques as Just-in-Time and Local Vendor Agreements. It did not include Purchase Cards, which were the subject of the team’s review report released last December.
A summary of key findings and recommendations is attached. Also attached are key actions already taken by Los Alamos to correct the deficiencies described in the report.
In addition to Layton and the PricewaterhouseCoopers forensic accountants, the External Review Team included Charles C. Masten, former U.S. Department of Labor Inspector General, and James W. Culpepper, former deputy manager of the Department of Energy Albuquerque Operations Office.
“We are fortunate to have been advised by such a distinguished and professional team of experts,” said UC vice president for financial management Anne Broome, who is currently overseeing LANL business and administrative activities. “While we are disappointed by the degree of control weaknesses, the External Review Team has provided us with a valuable roadmap to help complete the important job that has begun at Los Alamos. In addition, I am pleased to see their endorsement of corrective actions already implemented.”
UC is also expected soon to release an independent report from Ernst & Young, whose consultants are reviewing the Laboratory’s key business practices. Additionally, the Laboratory is undertaking a separate wall-to-wall property that will address outstanding property issues.
A full copy of the External Review Team report can be found at http://www.universityofcalifornia.edu/news/losalamos/reports/exreviewreport.pdf
Staffing and data systems. To meet concerns about procurement understaffing, the External Review Team recommends an evaluation of staffing needs across all procurement functions, as well as possible organizational changes. LANL’s front-end procurement data system did not record or maintain transactional detail and could not generate historical data, which impacted the Lab’s ability to generate statistics necessary for management decision-making and external reporting.
Contract awards. LANL lacked a definitive listing of required Terms and Conditions (T&C) that must be included in subcontracts. The result was the potential to exclude required T&Cs from subcontracts, and inconsistency in the T&Cs across teams and buyers. In addition, the team noted that during its review period, 53% of dollar amounts committed to new subcontracts were committed via non-competitive awards.
Property-controlled items. LANL policy requires that items with a purchase or manufacture cost of greater than $5,000 as well as items defined as “sensitive” and “attractive” (including computers, recording devices and cameras) be identified and tracked as controlled property. The team found that because of deficiencies in LANL’s property management procedures and systems, including differing property-control procedures across procurement methods, fundamental controls could be circumvented. While the team noted that LANL has recently made “significant progress with respect to identifying and eliminating long-standing control weaknesses and process breakdowns,” it recommended analyses and list revisions to further ensure integrity of the property management system.
“Business necessity” items. The team questioned whether a number of purchases, including shoes, clothing, hand lotion, eyeglasses and outerwear, met a test of “business necessity.” The team concluded that LANL lacks adequate policies and procedures to guide such purchases, creating the potential for abuse.
Contract administration. The team found many deficiencies in LANL’s contract administration, including that buyers admitted performing the “bare minimum” in reviewing and approving invoices. In addition, the team noted that subcontracts were often entered into for low dollar amounts, and more than half of the contracts reviewed had been subsequently modified to raise the contract ceiling – many by more than 100% above the original contract ceiling.
Blanket purchase agreements. These agreements, which are designed to avoid the administrative cost of issuing multiple purchase orders and subcontracts and to obtain quantity discounts when a recurring need for goods or services are anticipated, have been under question since it was revealed that several LANL employees used a blanket purchase agreement to purchase hunting supplies and camping equipment, among other items. The team found that the risk factors involved in this particular case extend to other Lab agreements and determined that, without a formalized control structure, such agreements are more vulnerable to fraud and abuse than other contract mechanisms.
Just-In-Time (JIT). This program was introduced in 1989 to reduce costs by streamlining the purchasing process and transferring the burden of warehousing supplies from LANL to the vendor. JIT vendors provide commodities such as computer equipment, tools, chemicals and office products. The team found that the program lacked a single program administrator and appropriate policies and procedures, leading to insufficient standardization and consistency.
The team also found that subcontracts tended to be modified rather than recompeted or renegotiated, and vendors had the ability to change, delete, price and even determine property control requirements for JIT items. The team noted that some vendors bundled multiple items into one “material requisition” order, which circumvented key program controls and makes pricing analysis difficult. These lack of controls created a high risk for system misuse and/or abuse.
Weaknesses also existed in the JIT shipping system, even allowing for vendors to authorize the initiation of the payment process without LANL intervention. And the team identified one case in which 164 items of apparel totaling $14,530 were purchased from LANL’s JIT tool supplier. The University has brought this matter to the attention of the Department of Energy Office of the Inspector General.
Local Vendor Agreements (LVA). These are purchasing agreements with local area vendors for the procurement of in-stock items that are needed immediately. LVA vendors submit invoices directly to LANL for payment, but the team found that transaction receipts are not necessarily reviewed before payment. The program also lacked a single program manager and formalized policies and procedures. The team found that there were inadequate controls over requesters making LVA purchases. For example, any LANL badge-holder could make purchases without prior approval and potentially for unallowable items.
Information management. Los Alamos National Laboratory (LANL) is in the process of implementing an Oracle enterprise system, which will improve the ability to generate procurement statistics that are necessary for management decision-making and external reporting. In addition, LANL recently initiated a Group Leader Business Stewardship Reporting program, which includes monthly reports of procurements and other related data. Managers are also now required to review and confirm the appropriate use of Laboratory resources.
Organizational structure. LANL has changed its distributed procurement reporting structure, making distributed buyers report directly to a Procurement team leader, in order to strengthen supervision and controls of Lab procurement. LANL also recently created a Procurement Quality Assurance function, which will include 16 full-time staff members, to monitor, identify and improve Lab procurement on an ongoing basis.
Property-controlled items. LANL’s Director of Administration has commissioned a team to document the property management process from “cradle to grave” and to identify and remedy system failures by April 30, 2003.
Purchase orders. The Procurement Quality Assurance Team described above will be responsible for maintaining LANL’s policies and procedures, terms and conditions and contract templates, as well as for reviewing, revising and developing tools, guidance, formats and checklists to support both requesters and buyers. The Laboratory has also established a new policy that requires prior review of all contract modifications exceeding 50% of the original contract value or of contracts exceeding $550,000.
Just-In-Time (JIT). LANL has developed a staffing plan to increase the number of employees handling JIT contracts. In the interim, the Lab is using other staffing resources to work through the backlog of vendor price reviews, in order to ensure that the Lab receives the lowest possible prices of goods it purchases. It has also committed to developing a strategy to compete JIT subcontracts and to require managers to validate purchases made via purchase cards, local vendor agreements, Just-in-time, etc., on a monthly Group Leader Stewardship report
Local Vendor Agreements (LVA). The Lab has announced it will dramatically reduce the number of individuals allowed to make LVA purchases and has identified individuals in divisions to serve as central control points for LVA purchases. It has also proposed a number of policy changes, including pre-authorization for the purchase of safety shoes, safety and/or computer glasses, and other personal equipment and institution of a material receipt validation process. The purchase of other items will require requesters to complete a LVA Request Form that is to be authorized by a designated division buyer. Managers will be required to validate purchases made via purchase cards, local vendor agreements, Just-in-time, etc., on a monthly Group Leader Stewardship report
Send comments or questions
about this web site to one of the webmasters