M04 Limited Sources Justification_Redacted.pdf

CUI

PROCUREMENT SENSITIVE

SOURCE SELECTION SENSITIVE

REDACTED COPY

LIMITED SOURCES JUSTIFICATION

DEPARTMENT OF DEFENSE OFFICE OF INSPECTOR GENERAL

FINANCIAL STATEMENT AUDITS OF THE NAVY GENERAL FUND;

UNITED STATES MARINE CORPS GENERAL FUND; AND THE

DEPARTMENT OF THE NAVY WORKING CAPITAL FUND

REFERENCES:

FAR 8.405-6

DOCUMENTATION:

1. IDENTIFICATION OF THE REQUIRING AND CONTRACTING ACTIVITY:

Requesting Activity:

Department of Defense Office of the Inspector General (DoD IG)

4800 Mark Center Drive

Alexandria, VA 22311

Contracting Activity:

DFAS Columbus

Contract Services Directorate

Building 21, Room 2B218

3990 E. Broad St.

Columbus, Oh 43213-1152

2. NATURE OR DESCRIPTION OF THE ACTION:

In accordance with 31 U.S.C. § 3515(a), “the head of each covered executive agency shall prepare and submit to Congress and the Director of the Office of Management and Budget an audited financial statement for the preceding fiscal year, covering all accounts and associated activities of each office, bureau, and activity of that agency.” The DoD IG is tasked with obtaining annual audits of DoD components by an Independent Public Accountant (IPA). 10

U.S.C. § 240d(a). DFAS performs the contracting work for the DoD IG for these requirements.

In 2020, in accordance with a Business Case Analysis1, DFAS solicited a single contract to the IPA Ernst & Young (EY), for consolidated financial statement audits beginning January 1, 2021, for these DoD components:

1 In accordance with the attached Consolidation of DON and USMC Financial Statement Audit Contract Business Case

Analysis, dated 15 June 2020, the three audits were solicited as a consolidated requirement to reduce costs, standardize audit processes to increase overall efficiency, and maximize auditor learning curve efficiency.

(1) Department of the Navy (DON) Working Capital Fund (WCF);

(2) United States Navy General Fund (Navy GF); and

(3) United States Marine Corps General Fund (USMC GF)

Prior to this action, the subject contract was modified to convert the USMC GF Fiscal Year

(FY) 2022 and 2023 annual report cycles to a single two-year annual report cycle. That modification allowed the IPA to report an opening balance that was reliable and auditable, and resulted in the first Military Service unmodified audit opinion in DoD history. The purpose of this action is similarly to modify this contract to convert the DON WCF financial statement audit from a one-year cycle to a two-year cycle for FY2025 and FY2026, and, because this contract was solicited in 2020 as a consolidated requirement for all three Navy components, to add additional one-year audit cycles for the Navy GF and USMC GF financial statement audits.

Converting the DON WCF from a one-year to a two-year audit cycle is necessary to provide audit results that will allow the government to assess the reliability of the DON WCF financial management systems, effectiveness of internal controls and compliance with laws and regulations. Audit procedures and lessons learned during the successful USMC two-year audit can be adapted and applied to the DON WCF universe of transactions, allowing the DON

WCF to make corrections necessary to support an unmodified audit opinion. Based on internal testing results, coupled with external auditor testing of inventory balances during the beginning of FY2025, the DON WCF is ready for a two-year audit plan with an opinion outcome.

Finally, because the DON WCF, Navy GF, and USMC GF audit reports were solicited without objection as a consolidated requirement, the Navy GF and USMC GF FY2026 annual financial statements will require an extension to 31 December 2026 to allow for all relevant audit testing and adjustments necessary to support an opinion for an entity with the size, complexity, scope, and global footprint of the Department of the Navy.

This modification will increase the current contract amount by approximately $69.4M.

3. DESCRIPTION OF SUPPLIES/SERVICE:

Financial statement audits performed by IPAs are available on GSA FSS for commercial services. This particular, limited requirement, for the conversion of the ongoing DON WCF one-year audit cycle to a two-year audit cycle and a concomitant additional 12-month period for the consolidated Navy GF and USMC GF audits, can only be obtained from the current auditor, EY. The results obtained from this audit will allow DON management to assess the reliability of financial management systems, effectiveness of internal controls, and compliance with laws and regulations. The audit shall be conducted in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the

United States.

4. STATUTORY AUTHORITY AND SUPPORTING RATIONALE:

FAR 8.405-6 (a)(1)(B), which allows orders placed under FSS to limit competition if “only one source is capable of providing the supplies or services required at the level of quality required because the supplies or services are unique or highly specialized.”

Importantly, the 2024 National Defense Authorization Act (2024 NDAA) requires the

Secretary of Defense to “ensure that the Department of Defense has received an unqualified opinion on the financial statements of the Department by not later than December 31, 2028.”

P.L. 118-31, Sec. 100. However, while the 2024 NDAA requires an unmodified opinion no later than the end of calendar year 2028, DoD/Navy leadership established an earlier goal date for the DON WCF, requiring an opinion by the end of FY2026.

This specific and narrow requirement is to convert a currently ongoing audit of a Navy component from a one-year audit cycle to a two-year audit cycle. It is not feasible to change auditors and perform extensive additional testing in the middle of a two-year audit cycle.

Changing auditors would not occur between two separate reporting years but instead would come in the middle of a current, ongoing audit, which would render it unlikely that a successor auditor could perform necessary work and acquire sufficient appropriate evidence to issue an audit opinion. A two-year audit cycle appears to be unique to the Federal Government and we did not identify any other non-government two-year audits. In fact, changing auditors in the middle of an ongoing audit is so uncommon that the government could not identify audit guidance for this scenario.

Therefore, only one source, the current IPA for the DON WCF, is capable of providing the services for the ongoing, partially completed audit of the DON WCF at a level of quality that will comport with generally accepted government auditing standards. Similarly, because these audit requirements were successfully consolidated into one contract, only one source, the current IPA, is capable of providing the necessary FY2026 Navy GF and USMC GF annual financial statement audit opinions.

There is a significant risk that the Navy will fail to reach an audit opinion by 2028 as statutorily required if this contract is not modified. Such failure would negatively impact

DoD’s statutory mandate to receive an audit opinion for all of DoD.

5. CONTRACTING OFFICER DETERMINATION THAT THE ORDER REPRESENTS

THE BEST VALUE AND ANTICIPATED COST IS FAIR AND REASONABLE:

This action will be a labor-hour contract type. The estimated price is $69.4M. The Contracting

Officer determined that EY provided the best value to the government for the previous competitively awarded contract.

Priced labor rates and labor mix quoted by EY for this action were reviewed in accordance with FAR 8.405-2(d) and DoD Class Deviation 2014 O0011 and the anticipated cost to the

Government is determined fair and reasonable.

6. DESCRIPTION OF THE MARKET RESEARCH CONDUCTED AMONG

SCHEDULE HOLDERS AND THE RESULTS OR A STATEMENT OF THE

REASON MARKET RESEARCH WAS NOT CONDUCTED.

An analysis of the General Services Administration (GSA) Multiple Award Schedule (MAS), Professional Services – Financial Services (PS-FS), category 541211 Auditing Services indicates there are 200 potential suppliers that may be able to provide the services required.

However, only the current IPA, EY, and , responded to the most recent sources sought notice issued by DFAS. These companies demonstrated interest in this requirement and claimed independence to the DON financial statements.

7. ANY OTHER FACTS SUPPORTING THE JUSTIFICATION.

The original order was competed as a consolidated requirement for DON WCF, Navy GF, and

USMC GF, under RFQ HQ042320Q0009, utilizing GSA MAS 541211. The efficiencies and cost savings identified in the June 2020 Business Case Analysis remain today. These benefits further support this modification and the need to maintain this consolidated action supporting the DON.

8. ACTIONS THE AGENCY MAY TAKE TO REMOVE OR OVERCOME ANY

BARRIERS THAT LED TO THE TO THE RESTRICTED CONSIDERATION.

The DON WCF has made significant improvements to prepare for an audit opinion in FY2026 with this two-year audit cycle. The government expects such improvements to allow subsequent Navy financial statement audits to be solicited using fully competitive procedures.

9. TECHNICAL CERTIFICATION.

I hereby certify that this justification is made in good faith, that the supporting data and information are accurate and complete to the best of my knowledge and belief, and that I would not be making this request if it were feasible to fully compete this requirement. I further certify that this request is not the result of lack of advanced planning or a desire to expend funds while those funds are still available.

Assistant Inspector General, Audit

Financial Management and Reporting