Page 1 FDIC Federal Deposit Insurance Corporation 3501 Fairfax Drive, Arlington, VA 22226 Office of Inspector General DATE: March 23, 2012 MEMORANDUM TO: Board of Directors Audit Committee FROM: on T. Rymer Inspector General SUBJECT: The National Owned Real Estate Management and Marketing Services Contract with CB Richard Ellis, Inc. (Report No. The attached report presents the results of the Office of Inspector General's audit of the National Owned Real Estate Management and Marketing Services Receivership Basic Ordering Agreement (ORE RBOA), contract RECVR--08--G--015 1, which we performed in response to an FDIC management request. Our objectives were to determine whether costs that CB Richard Ellis, Inc. (CBRE) billed the FDIC under the ORE RBOA were supported adequately, consistent with the terms and conditions of the contract, allowable, and reasonable. We determined that a preponderance of CBRE's claims paid by the FDIC from Contract inception through July 31, 2011 were adequately supported, consistent with the terms and conditions of the contract, allowable, and reasonable. We identified $42,015 (1 percent of amounts tested) in claims that were not consistent with the contract terms. In addition, based on the statistical sampling methodology we employed, we estimated that there is a 90--percent probability that the actual amount that the FDIC paid for CBRE claims that were not consistent with the contract terms or were not adequately supported would not be less than $398,227, and that the actual amount of costs not adequately supported would not be less than $57,226. We made recommendations that management disallow the $42,015 in claims we determined through testing were inconsistent with contract terms and consider disallowing the statistically--projected questioned amounts. Management's response adequately addressed our recommendations. We also included a number of observations regarding opportunities to enhance the economy, efficiency, and effectiveness of similar existing or future FDIC contracts. We do not intend to publicly release the report in its entirety and distribution is for official use only. We Will, however, post the Executive Summary on our public Web site. We request that you safeguard the contents of the report accordingly. If you have any questions, please call me at (703) 562-2166 or Stephen M. Beard, Deputy Inspector General for Audits and Evaluations, at (703) 562-6352. Attachment Page 2 FDIC Federal Deposit Insurance Corporation Office of Audits and Evaluations 3501 Fairfax Drive, Arlington, VA 22226 Office of Inspector General DATE: March 23, 2012 MEMORANDUM TO: Arleas Upton Kea, Director Division of Administration Bret D. Edwards, Director Division of Resolutions and Receiverships FROM: Stephen M. Beard Deputy Inspector General for Audits and Evaluations SUBJECT: The National Owned Real Estate Management and Marketing Services Contract with CB Richard Ellis, Inc. (Report No. This report is provided in response to your request that we audit the FDIC's contract for owned real estate management and marketing services with CB Richard Ellis, Inc. (CBRE). We found that a preponderance of CBRE's claims paid by the FDIC from contract inception through July 31, 20ll were adequately supported, consistent with the terms and conditions of the contract, allowable, and reasonable. We made two recommendations for the FDIC to disallow questioned claims that we identified during our testing and a third recommendation to consider disallowing statistically--projected questioned amounts. We also included a number of observations regarding opportunities to enhance the economy, efficiency, and effectiveness of similar existing or future FDIC contracts. Our evaluation of your response to a draft of this report is incorporated into the body of the report. Your response was sufficient to resolve the recommendations. In addition, we acknowledge and summarize CBRE's response to sections of the draft report specifically involving claims reviewed and amounts questioned. Consistent with the OIG's established approach to the Corrective Action Closure (CAC) process, the OIG plans to limit its review of CAC documentation to those recommendations that we determine to be particularly significant. Such determinations will be made when the Division of Finance, Corporate Management Control (CMC) advises us that corrective action for a recommendation has been completed. Recommendations deemed to be significant will remain open in the OIG's System for Tracking and Reporting (STAR) until we determine that corrective actions are responsive. All other recommendations will be closed in STAR upon notification by CMC that corrective action is complete but remain subj ect to follow--up at a later date. We do not intend to publicly release the report in its entirety and distribution is for official use only. We will, however, post the Executive Summary on our public Web site. We request that you safeguard the contents of the report accordingly. Page 3 If you would like to discuss this report, please contact E. Marshall Gentry, Assistant Inspector General for Evaluations, at (703) 562-6378 or A. Michael Stevens, Evaluations Manager, at (703) 562-6381. We appreciate the courtesies extended to the audit staff. Attachment cc: Thomas D. Harris, Deputy Director, Acquisition Services Branch, DOA Gail Patelunas, Deputy Director, Receivership Operations Branch, DRR James H. Angel, Deputy Director, Corporate Management Control, DOE Daniel Bendler, Chief, Management Support Section, DOA Steven K. Trout, Manager, Intemal Review Section, DRR Howard Cope, Manager, Internal Review Section, DRR David Chapman, Chief Statistician, Data Applications Section, DIR Page 4 Office of Evaluations Report No. EVAL-12-003 The National Owned Real Estate Management and Marketing Services Contract with CB Richard Ellis, Inc. This report contains sensitive information and is for official use only. Other than the Executive Summary, the contents of the report are not releasable without the approval of the Office of Inspector General. March 2012 Page 5 Executive Summary The National Owned Real Estate Office of Management and Marketing Services Contract I 1 with CB Richard Ellis, Inc. Report No. EVAL--12--OO3 March 2012 Why We Did The Audit FDIC management requested and the FDIC Office of Inspector General (OIG) completed an audit to determine Whether costs that CB Richard Ellis, Inc. (CBRE), billed the FDIC under contract RECVR--08--G--0151, the National Owned Real Estate Management and Marketing Services Receivership Basic Ordering Agreement (ORE RBOA), were supported adequately, consistent with the terms and conditions of the contract, allowable, and reasonable. To achieve our objective, we tested a statistically valid selection of the universe of CBRE invoices under this contract that the FDIC paid from contract inception through July 31, 2011. Background The FDIC's Division of Resolutions and Receiverships (DRR) sought contractor services to assist in the acquisition, management, research and preparations for marketing, and ultimate sale of owned real estate property that the FDIC acquires as receiver of failed financial institutions. In November 2008, the FDIC executed RBOA contract RECVR--08--G--015 1, effective November 14, 2008, with CBRE. The initial term of the ORE RBOA was 3 years with three options, each to extend the contract for 2 years. CBRE and the FDIC agreed in August 2011 to terminate the ORE RBOA. The FDIC's plan to transition ORE assets to other RBOA contractors was completed at the end of December 2011. Among other things, the ORE RBOA required the contractor to 0 at all times act in good faith and in the best interests of the FDIC, and use its best efforts and exercise all due care and sound business judgment in performing its duties under the 0 maintain books, records, documents, and other evidence sufficient to reflect properly all costs claimed to have been incurred in performing the contract; and 0 make available records relating to the work terminated for 3 years after any resulting final settlement. We determined that the FDIC paid CBRE $108,319,278 (not including funding advances, which we excluded from our testing) for contract services and pass--through asset--level expense reimbursements from contract inception through July 31, 2011. The invoices comprising that amount represent our sample universe. Audit Results Based on a review of a statistically valid sample of invoice line items, we determined that a preponderance of CBRE's claims paid by the FDIC from contract inception through July 31, 2011 were adequately supported, consistent with the terms and conditions of the contract, allowable, and reasonable. Of $4,094,787 tested from 1,623 sampled claims, we found $42,015 (1.03 percent of amounts tested) in 129 claims (7.95 percent of the number of claims tested) that were not consistent with the contract terms in the four types of invoices that we reviewed. We found the following among the four types of claims that we tested: Page 6 The National Owned Real Estate Executive Summary Services Contract Report No. EVAL-12-O03 March 2012 0 Asset Management Fees -- We tested 587 claims totaling $538,464. We found that CBRE claimed and the FDIC paid $6,969 (1.29 percent) in asset management fees that were not consistent with the contract terms. 0 Pass--Through Expenses -- We tested claims for 718 assets that comprised 2,283 individual bills (which is actually an indeterminately greater number because the detailed data that CBRE provides to the FDIC rolls up certain expenses that are contained on multiple bills). Claims tested totaled $1,345,397. We found that CBRE claimed and the FDIC paid $7,140 (0.53 percent) more than appropriate per the contract, which includes both incorrect and unsupported claims. 0 Labor and Travel Expenses -- We tested 163 claims totaling $1,965,317. We found that CBRE claimed and the FDIC paid a net of $30,996 (1.58 percent) that was not consistent with the contract terms, which includes both incorrect and unsupported claims. 0 Other Expenses -- We tested 69 other expense invoices (those not falling into one of the three areas above) in their entirety comprising $245,609 in total claims. We found that, netting overcharges with undercharges, CBRE could have but did not claim $3,090 (1.26 percent) more than the FDIC paid for other expenses. Based on our testing a statistically valid sample of items that CBRE claimed and the FDIC paid in that period, we calculated an unbiased projection of questioned costs to be $742,558 (0.69 percent of the sample universe). In addition, we estimated that there is a 90--percent probability that the actual amount of CBRE claims that should be questioned would not be less than $398,227, and that the actual amount of costs not adequately supported would not be less than $57,226. These projections reflect certain instances in which CBRE could have but did not make allowable claims. We made three recommendations for the FDIC to disallow components of the questioned claims. We plan to report $398,227 as total questioned costs, and report $57,226 as unsupported costs in the OIG's next Semiannual Report to the Congress. The amount ultimately disallowed by the FDIC could change based on final management decisions after evaluating the findings and recommendations included in the report. In addition, we are including a number of observations, while neither within the scope nor fully evaluated as part of this audit, regarding opportunities to enhance the economy, efficiency and effectiveness of similar existing or future FDIC contracts. Management Comments The Directors of the Division of Administration and the Division of Resolutions and Receiverships jointly provided a written response, dated March 6, 2012, to a draft of this report. In the response, the Directors concurred with the two recommendations to disallow questioned costs that were not consistent with the contract terms, net of claims that CBRE could have but did not make, and that CBRE could not adequately support as consistent with the contract terms. Regarding the third recommendation, the Directors acknowledged that the projected questioned costs may be statistically valid, but decided not to pursue collection of projected questioned costs based on the low error rate in the sample and the probability that collection costs would exceed recoveries. Page 7 The National Owned Real Estate Executive Summary Services Contract Report No. EVAL-12-O03 March 2012 We also provided CBRE with sections of the draft report specifically involving claims reviewed and amounts questioned. In a letter to our office responding to the report, CBRE acknowledged the audit results, but requested that language in the report associated with unsupported expenses and questioned claims be clarified. Further, CBRE questioned Whether statistical projections were appropriate considering the firm used prudent judgment and acted in good faith and in the best interests of the FDIC in performing its duties under the ORE RBOA. We considered CBRE's comments in finalizing our report. Because this report includes sensitive information, we do not intend to publicly release the report in its entirety. We will, however, post this Executive Summary to our public Web site. Page 8 Contents Page BACKGROUND ..1 AUDIT RESULTS ..3 Asset Management Fees ..3 Pass-Through Expenses ..4 Labor and Travel Expenses ..5 Other Expenses ..7 RECOMMENDATIONS ..7 OBSERVATIONS REGARDING OPPORTUNITIES TO ENHANCE SIMILAR CONTRACTS ..8 Consider Ways to Further Mitigate Risks ..8 Define Relevant Contract Terms ..8 Augment the Pricing Schedule ..9 Revisit Compensation for Some Services ..1O Address Asset Participations ..10 MANAGEMENT COMMENTS AND OIG EVALUATION ..11 Appendices 1. Objective, Scope, and Methodology ..12 2. Statistical Sampling Methodology ..14 3. Explanation of Monetary Benefit Terms and Monetary Results .. 17 4. Corporation Comments ..19 5. Summary of FDIC Management's Response to the Recommendations ..21 Tables Contract Invoices Paid by the FDIC through July 31, 2011 ..2 Claims Tested and Amounts Questioned ..3 Sensitive Information -- For Official Use Only Page 9 FDIC Federal Deposit Insurance Corporation Office of Audits and Evaluations 3501 Fairfax Drive, Arlington, VA 22226 Office of Inspector General DATE: March 23, 2012 MEMORANDUM TO: Arleas Upton Kea, Director Division of Administration Bret D. Edwards, Director Division of Resolutions and Receiverships FROM: Stephen M. Beard Deputy Inspector General for Audits and Evaluations SUBJECT: The National Owned Real Estate Management and Marketing Services Contract with CB Richard Ellis, Inc. (Report No. FDIC management requested and the FDIC Office of Inspector General (OIG) completed an audit to determine whether costs that CB Richard Ellis, Inc. (CBRE), billed the FDIC under contract the National Owned Real Estate Management and Marketing Services Receivership Basic Ordering Agreement (ORE RBOA), were supported adequately, consistent with the terms and conditions of the contract, allowable, and reasonable. To achieve our objective, we tested a statistically valid selection of the universe of invoices under this contract that the FDIC paid from contract inception through July 31, 2011. Appendix 1 presents additional details on our objective, scope, and methodology. Appendix 2 describes our statistical sampling methodology. BACKGROUND The FDIC's Division of Resolutions and Receiverships (DRR) sought contractor services to assist in the acquisition, management, research and preparations for marketing, and ultimate sale of owned real estate property that the FDIC acquires as receiver of failed financial institutions. Due to the widely varying size and types of assets from failed institutions, scalability and flexibility of the contractor's workforce was essential. On November 13, 2008, the FDIC executed RBOA contract effective November 14, 2008, acting as receiver for various institutions and in its corporate capacity with CBRE, a Delaware corporation with a principal place of business in Washington, D.C. The ORE RBOA provided for services to assist the FDIC in the Sensitive Information -- For Official Use Only Page 10 identification, acquisition, managing, and marketing (sales and disposition) activities of all ORE assets. Among other things, the ORE RBOA required the contractor to 0 at all times act in good faith and in the best interests of the FDIC, and use its best efforts and exercise all due care and sound business judgment in performing its duties under the 0 maintain books, records, documents, and other evidence sufficient to reflect properly all costs claimed to have been incurred in performing the contract; and 0 make available records relating to the work terminated for 3 years after any resulting final settlement. We determined that the FDIC paid CBRE $108,319,278 from contract inception through July 31, 2011, not including funding advancesl to bank accounts that CBRE would use to pay expenses allowed under the contract. We excluded invoices for funding advances from our testing because the actual expenses claimed from the advances would be tested by our sample of remaining invoices and amounts that the FDIC paid. Our audit applied a statistical sampling methodology with reasonable target precision to allow us to project our results across the universe of invoices that the FDIC paid CBRE under the contract through July 31, 2011. Those invoices represent our universe as shown in Table 1. Table 1: Contract Invoices Paid by the FDIC through July 31, 2011 Invoice Type Number Value Tested Sampled Value Asset Management Fees 1,376 $25,874,899 61 $538,464 Pass--Through Expenses 1,410 $75,625,827 63 $1,345,397 Labor and Travel Expenses 172 $5,312,234 73 $1,965,317 Other Expenses* 269 $1,506,318 69 $245 ,609 Invoices Eligible for Testing 3,227 $108,319,278 266 $4,094,787 ?ource: OIG analysis of a DRR data extract from the New Financial Environment. Other expenses invoices are those that were not one of the three other invoice types. The initial term of the ORE RBOA was 3 years with three options, each to extend the contract for 2 years. |The FDIC and |and agreed to terminate the ORE RBOA. The FDIC's plan to transition ORE assets to other RBOA contractors was completed at the end of December 2011. 1 The audit also excluded $1,010,984 paid for pass-through expenses based on incorrectly classifying the invoice as a funding advance. 2 Sensitive Information -- For Official Use Only Page 11 AUDIT RESULTS We determined that a preponderance of CBRE's claims paid by the FDIC from contract inception through July 31, 2011 were adequately supported, consistent with the terms and conditions of the contract, allowable, and reasonable. Of $4,094,787 tested from 1,623 sampled claims, we found $42,015 (1.03 percent of amounts tested), including $19,462 in costs the audit determined to be inadequately supported, in 129 claims (7.95 percent of the number of claims tested) that were not consistent with the contract tenns in the four types of invoices that we reviewed? Based on testing a statistically valid sample of items that CBRE claimed on invoices that the FDIC paid from contract inception through July 31, 2011,3 We calculated an unbiased projection of the questioned costs for the audit universe (claims that CBRE made and the FDIC paid from contract inception through July 31, 2011) to be $742,558. In addition, we estimated that there is a 90--percent probability that the actual amount that the FDIC paid for CBRE claims that were not consistent with the contract terms or were not adequately supported would not be less than $398,227.4 The projection incorporates our findings that, in some cases, CBRE could have but did not make some claims. Table 2 summarizes our testing and results, which are explained more fully in subsequent sections of this report. Table 2: Claims Tested and Amounts Questioned Number Amount of Amounts Tested Projected of Claims Exceptions to ORE Inadequately Amounts Questioned Invoice Type Tested RB OA Criteria Supported Questioned Costs Asset Management Fees 587 $6,969 n/a $6,969 $320,770 Pass--Through Expenses 718 $2,650 $4,490 $7,140 $340,748 Labor and Travel Expenses 163 $16,024 $14,972 $30,996 $93,084 Other Expenses 155 ($3,090) n/a ($3,090) ($12,044) Total 1,623 $22,553 $19,462 $42,015 $742,558 Source: OIG testing and analysis, with projections from DIR. Asset Management Fees We randomly selected 61 asset management fee invoices. From those, we randomly selected 587 individual claims that totaled $538,464. 2 3 Our statistical sampling methodology was developed in consultation with the Division of Insurance and Research's (DIR) Data Applications Section and is described in detail in Appendix 2. 4 Because the audit found no exception with any issue that the 3 Sensitive Information -- For Official Use Only Page 12 We found that CBRE incorrectly claimed and the FDIC paid $6,969 (1.29 percent) of the tested asset management fee claims, net of claims CBRE could have but did not make. Based on those results, We projected the questioned costs of the universe for asset management fees to be $320,770. Amounts questioned included: 0 11 billing errors totaling $14,797 (2.75 percent) that CBRE corrected prior to audit; and 0 8 billing errors totaling $2,692 (0.50 percent) related to an FDIC duplicate payment that CBRE repaid prior to the audit. In addition, our testing found the following amounts that the FDIC paid for CBRE claims that were not consistent with the contract terms: Pass-Th rough Expenses We randomly selected 63 pass--through expense invoices. From those, We randomly selected 718 claims that totaled $1,345,397. We found that $2,650 (0.20 percent) of the tested CBRE pass--through expense claims that FDIC paid were not consistent with the contract terms. In addition, We found that, although required by the contract, CBRE could not adequately support an additional $4,490 (0.33 percent) of pass--through expense claims it made and that the FDIC paid. Therefore, overall, we found that the FDIC overpaid $7,140 (0.53 percent) of tested pass- through expenses. Based on those results, we projected the questioned costs of the universe for pass--through expenses to be $340,748. We determined that the following claims that CBRE made and the FDIC paid were not reasonable pass--through expenses: 4 Sensitive Information -- For Official Use Only Page 13 CBRE submitted and the FDIC paid three claims of $350, $1,600, and $2,540 purportedly fo1i(b)(4) Iexpenses that comprised the $4,490 that CBRE could not adequately support. As noted previously, the ORE RBOA requires CBRE to maintain and make available books, records, documents, and other evidence sufficient to reflect properly all costs claimed to have been incurred in performing the contract. Labor and Travel Expenses We randomly selected 75 labor and travel expense invoices. Two of the 75 invoices were misclassified and we tested those with other expense invoices. From the remaining 73 invoices, We randomly selected 163 individual labor and travel claims that totaled $1 ,965,3 17. We found that $16,024 (0.82 percent) of the tested labor and travel expense claims that CBRE made and the FDIC paid were not consistent With the contract terms, net of claims CBRE could have but did not make. In addition, we found that, although required by the contract, CBRE could not adequately support an additional $14,972 (0.76 percent) of labor and travel expense claims it made and that the FDIC paid. Therefore, overall, We found that the FDIC overpaid $30,996 (1.58 percent) of tested labor and travel expenses. Based on those results, we projected the questioned costs of the universe for labor and travel expenses to be $93,084. Claims that were not consistent with the contract terms included 5 Sensitive Information -- For Official Use Only Page 14 addition, the following are the most significant exceptions that We found to ORE RBOA criteria: The following Were labor and travel expense claims that CBRE could not adequately support: 6 Sensitive Information -- For Official Use Only Page 15 Other Expenses We randomly selected 69 other expense invoices that comprised 155 individual claims that totaled $245,609. We found that $911 (0.37 percent) of tested other expense claims that CBRE made and the FDIC paid were not consistent With the contract terms. However, We also found that CBRE could have but did not claim other expenses totaling $4,000 (1.63 percent). Therefore, overall, we found that the FDIC underpaid $3,089 (1.26 percent) of tested other expense claims. Based on those results, We projected the questioned costs of the universe for other expenses to be a negative $12,044. We determined that CBRE made and the FDIC paid the following claims that Were not consistent with the contract terms: Those incorrect claims were more than offset by claims that CBRE could have but did not make for the RECOMMENDATIONS We recommend that the FDIC: 1. Disallow $22,553 for amounts that CBRE claimed and the FDIC paid that were not consistent with the contract terms, net of claims that CBRE could have but did not make; 2. Disallow $19,462 that CBRE claimed and the FDIC paid that CBRE could not adequately support as consistent with the contract terms; and 7 Sensitive Information -- For Official Use Only Page 16 3. Consider disallowing an additional $356,212, which represents the statistically Valid minimum of projected questioned costs of $398,227 less $42,015 in questioned costs identified through items tested. Appendix 3 of this report explains the OIG's monetary benefit terms and a summary of the questioned costs identified in this audit. OBSERVATIONS REGARDING OPPORTUNITIES TO ENHANCE SIMILAR CONTRACTS 8 Sensitive Information -- For Official Use Only Page 17 Page 19 MANAGEMENT COMMENTS AND OIG EVALUATION On March 6, 2012, the Directors of the Division of Administration (DOA) and DRR jointly responded to a draft of this report. In their response, they concurred with the first two recommendations: (1) to disallow questioned costs that were not consistent with the contract terms, net of claims that CBRE could have but did not make; and (2) to disallow questioned costs that CBRE could not adequately support as consistent with the contract terms. Regarding the third recommendation, the Directors acknowledged that the projected questioned costs may be statistically valid and stated that management decided not to pursue collection of projected questioned costs based on the low error rate in the sample and the probability that collection costs would exceed recoveries. Appendix 4 presents FDIC management's response in its entirety. After we issued our draft report, we determined that adjustments were needed in our estimates of the minimum actual amounts that the FDIC paid for CBRE claims that were not consistent with the contract terms, and of costs not adequately supported. We corrected those estimates in the final report. We advised the Directors of DOA and DRR of the revised estimates and they considered them in providing their written response to the report. We consider management's response sufficient to resolve the recommendations. In addition, with regard to the observations included in the report, an FDIC official advised us that DOA and DRR are reviewing the contract and associated processes to implement any changes as appropriate. In addition to discussing and resolving findings directly with CBRE throughout the audit, CBRE reviewed sections of the draft report specifically involving claims reviewed and amounts questioned. In a letter to our office dated February 28, 2012, CBRE endorsed the audit's core finding that a preponderance of claims paid by the FDIC from contract inception through July 31, 2011 conformed to contract terms. In addition, CBRE questioned whether statistical projections of the questioned costs were appropriate given the f1rm's belief that it had made prudent business judgments and acted in good faith and in the best interests of the FDIC in performing its duties under the ORE RB OA, and exercised all due care and sound business judgment in performing its duties. Further, CBRE requested that language in the report associated with unsupported expenses and questioned claims be clarified. We Considered Comments in finalizing this report. 11 Sensitive Information -- For Official Use Only Page 20 Appendix 1 Objective, Scope, and Methodology Objective The objective of our audit was to determine whether costs that CBRE billed the FDIC under contract RECVR O8--G--0l5l, the ORE RB 0A, were adequately supported, consistent with the terms and conditions of the contract, allowable, and reasonable. We conducted this audit from August 20ll to January 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Scope and Methodology To accomplish our objective, we: 0 Reviewed relevant records and files, including the ORE RBOA contract and select modifications, prior OIG audit or evaluation work relating to the ORE RBOA, and the DRR Asset Resolution Manual. 0 Met with appropriate DOA and DRR officials to discuss the audit objective, status of the contract, and the FDIC's relationship with CBRE and to consider any of the FDIC officials' specific concems. 0 Consulted with DIR staff to develop a statistical sampling methodology with reasonable target precision to allow projections across the universe of task orders, properties, invoices, and/or total amounts billed and paid under the RBOA. (See below and Appendix 2.) 0 Met with CBRE officials to gain a basic understanding of CBRE billing procedures and controls. 0 Determined the number of invoices and the amounts the FDIC paid under the RBOA from contract inception through July 3, 201 l, and stratified the universe based on invoice number coding into four groups: asset management fees, labor and travel expenses, pass--through expenses, and other expenses (those invoices that did not fall into the other three strata). 0 Randomly selected a statistically valid sample of invoices to confirm relevant data and address the audit objective. 0 Reviewed FDIC Contractor Travel Reimbursement Guidelines and the United States General Services Administration lodging allowance. 12 Sensitive Information -- For Official Use Only Page 21 Appendix 1 Objective, Scope, and Methodology FDIC staff not employed by the OIG supported this audit. A DRR intemal review specialist provided technical advice and Worked as an audit team member during audit planning and testing. In addition, a DIR statistician served as a specialist to the audit to develop the statistical sampling plan detailed in Appendix 2, advise the audit team on implementing the sampling plan, and perform the analysis included in this report projecting the results of audit testing to the universe of invoices paid under the contract from contract inception through July 31, 201 l. While these DRR and DIR staff members supported the audit, throughout the audit, the OIG remained responsible for all decisions regarding the scope, methodology, and reporting of audit results. Internal Control, Reliance on Computer-processed Information, Performance Measurement, and Compliance with Laws and Regulations Consistent with the stated objective, We did not assess the FDIC's or CBRE's overall internal control or management control structure beyond What we include in this report. We obtained data from the FDIC's and CBRE's information systems; however, we did not assess the effectiveness of information system controls. The Government Performance and Results Act of l993 (the Results Act) directs Executive Branch agencies to develop a customer--focused strategic plan, align agency programs and activities with concrete missions and goals, and prepare and report on annual performance plans. Such an assessment was not part of this audit's objectives. Program audits of FDIC operations review the FDIC's compliance with the Results Act. A wide range of potential risks for fraud exist With any contract. Key fraud risks related to this audit include false claims by the contractor or subcontractors Whose expenses are passed through to the FDIC, or duplicate claims by or payments to CBRE. We assessed the risk of fraud and abuse related to our objective in the course of evaluating audit evidence. 13 Sensitive Information -- For Official Use Only Page 22 Appendix 2 Statistical Sampling Methodology Audit Universe The universe for this audit was all invoices that CBRE submitted to the FDIC that the FDIC paid under the contract through July 31, 2011. We identified those invoices from data provided by the DRR's Business Operations Support Section, which provided a database of invoices based on queries they run routinely. There were no CBRE invoices paid in 2008. DRR provided the data in four Microsoft Excel files listing CBRE invoices paid in 2009, 2010, January--February 2011, and March--July 2011. The audit universe provided by DRR consisted of 3,260 invoices that the FDIC paid to CBRE from contract inception through July 31, 2011. We separated the universe into four strata (or types) based on the type of invoice, Which We determined from the invoice numbering system used for this contract. Our four strata were invoiced claims for: 0 Asset management fees, which are the charges that CBRE was entitled to claim based on the type, value, term of management, and other factors. 0 Pass--through expenses, which are costs related to managing assets that CBRE incurred and paid for through bank accounts the FDIC established and for which CBRE submitted invoices to replenish those bank accounts. 0 Labor and travel expenses, which are costs for personnel and travel expenses permitted under the contract. 0 Other expenses, which comprise invoices not in the other three strata and include a range of asset management--related expenses and other costs the FDIC incurred under the contract, including the advance of funds to bank accounts for pass- through expenses. We determined that 33 of the other expense invoices were for funding advances. We excluded those from our universe because the actual expenses claimed from those advances would be tested by our sample of remaining invoices and amounts that the FDIC paid. Sample Design We consulted With the DIR Data Applications Section to identify a means to sample the available data--paid invoices--statistically. As detailed below, the audit used a randomly selected two--stage stratified sample except for other expense invoices where the audit used a randomly selected single--stage sample. The sampling plan was designed so that, within "round--off error," items within each stratum have the same probability of selection. 14 Sensitive Information -- For Official Use Only Page 23 Appendix 2 Statistical Sampling Methodology Our purpose was to conduct variable sampling that would allow us to estimate the quantity of overpayment in dollars in the universe of payments that the FDIC made to CBRE under contract l, the ORE RBOA. Two--stage sampling was accomplished by a random selection of invoices at the first stage, followed by a random selection of line items within invoices at the second stage. The two stages of selection were conducted separately within either two or three substrata defined within each of the four primary strata (except for the other expenses stratum). The labor and travel expenses and pass--through expenses strata were segmented into large-- and small--dollar-- invoice substrata. The asset management fees stratum was separated into three substrata, defined by large--, medium--, and small--dollar--value invoices. We executed the sampling plan in a manner that allowed for additional testing, if desired. Sample Unit For other expense invoices, we used a single--stage sample by randomly sampling invoices and testing all the line items on each selected invoice. For the other three strata, we applied two--stage sampling where the invoices were the primary sampling unit and the specific billing lines on the invoices were the secondary sampling unit. What the specific billing lines on the invoices represented varied depending on the type of invoice. For labor and travel expense invoices, a billing line was a travel claim for an individual. For asset management fee invoices, a billing line was the fee charged for one asset (individual property or group of properties, based on the contract) in the invoice month. For pass--through expense invoices, a billing line was the total expenses claimed for an individual asset in one month. Sample Size We estimated our target total sample size considering time and resources available; precision targets for estimating universe totals; DRR's Internal Review testing experience and results; limited, high--level review of some invoices; and a rough estimate of total billing lines for invoices in each stratum from a judgmental test sample of 15-18 invoices from each stratum. Based on these factors, it was decided to select a total sample of between l,500 and 2,000 billing lines. Where our initial estimates of the average number of billing lines per invoice for a stratum varied significantly from actual results from the sample, we worked with the statistician and adjusted, before testing, the target sample size and the overall sampling rate for a stratum or substratum. Source of Random Numbers for Sample Selection The audit generated random numbers from the Defense Contract Audit Agency's (DCAA) EZ Quant (Version l.l.l) Statistical Analysis Software, which has a random 15 Sensitive Information -- For Official Use Only Page 24 Appendix 2 Statistical Sampling Methodology number generator function. DCAA developed and tested EZ--Quant for use in its audit processes. It is freeware, and its use and copying is unrestricted. Characteristics Measured The purpose of this audit's samples was to determine the extent of overpayments (or, if negative, underpayments) resulting from inadequate support or noncompliance with contract terms. Issues Iwere treated as complying with contract terms. Testing was done on the four strata of expenses and Varied among the strata. For example, testing for asset management fees determined Whether charges were correct for the property type and Value, while testing for pass--through expenses determined that there was sufficient supporting documentation for the expenses and that the expenses Were reasonable and appropriate under the contract. Within each stratum, testing was conducted consistently among all audit team members by using standardized data collection instruments. 16 Sensitive Information -- For Official Use Only Page 25 Appendix 3 Explanation of Monetary Benefit Terms and Monetary Results The Inspector General Act of l978, as amended, defines the terminology associated with monetary benefits identified by auditors and (2) establishes the reporting requirements for the identification and disposition of questioned costs in audit reports. In addition, the explanations provided below indicate that the process for actual recovery of questioned costs involves various stages, evaluations of factors, and decision--making processes. The following defines the key terms associated with monetary benefits and explains how they relate to each other. 0 First, auditors may identify "questioned costs" based on an alleged violation of a provision of a law, regulation, contract, grant, cooperative agreement, or other agreement or document governing the expenditure of funds. In addition, a questioned cost may be a finding in which, at the time of the audit, a cost is not supported by adequate documentation unsupported questioned cost); or a finding that the expenditure of funds for the intended purpose is unnecessary or unreasonable. It is important to note that the OIG does not always expect to recover l0O percent of all questioned costs. 0 The next step in the process of making a decision about questioned costs is a "management decision." This is the final decision issued by management after evaluating the finding(s) and recommendation(s) included in an audit report. The management decision must specifically address the questioned costs by either disallowing or not disallowing these costs. A "disallowed cost" is a questioned cost that management, in a management decision, has sustained or agreed should not be charged to the government. 0 Once management has disallowed a cost and, in effect, sustained the auditor's questioned costs, the last step in the process takes place which culminates in the "final action." This is the completion of all actions that management has determined are necessary to resolve the findings and recommendation included in an audit report. Typically, in the case of disallowed costs, management will evaluate factors beyond the conditions in the audit report, such as qualitative judgments of value received or the cost to litigate, and decide whether it is in the FDIC's best interest to pursue recovery of disallowed costs. Based on observed results from testing a statistically valid sample of items that CBRE claimed on invoices that the FDIC paid from contract inception through July 31, 2011, summarized in Table 2 in the body of this report, we calculated an unbiased projection of questioned costs to be $742,558. In addition, we estimated that there is a 90--percent probability that the actual amount that the FDIC paid for CBRE claims that were not consistent with the contract terms or were not adequately supported would not be less than $398,227.5 This projection reflects our findings that CBRE could have but did not make some claims. 5 As noted in Appendix 1, a DIR statistician, serving as a specialist to the audit, performed the analysis projecting the testing results to the audit universe. 17 Sensitive Information -- For Official Use Only Page 26 Appendix 3 Explanation of Monetary Benefit Terms and Monetary Results Our presentation of statistical projections in this report was consistent, to the extent possible, with DCAA's Guidance on Variable Sampling Policy, dated January 3, 2011. 18 Sensitive Information -- For Official Use Only Page 27 Appendix 4 Corporation Comments Federal Deposit Insurance Corporation 3501 Fairfax Dnve, Arlington, VA 22226-3500 Division at DATE: March 6, 2012 MEMORANDUM TO: Stephen M. Beard Deputy Inspector General for Audits and Evaluations FROM: Arleas Upton Kea, Director Division of Administration Bret D. Edwards, Director Division of Resolutions and Receiverships SUBJECT: Management Response to the Draft OIG Audit Report Entitled, Audit' of the National Owned Real Estate Management and Marketing Services Contract with CB Richard Ellis, Inc. (Assignment No. 201 I- 086) This is in response to the subject Draft Office of Inspector General (OIG) Audit Report, issued February 3, 2012. In its report, the OIG made three recommendations to the Division of Administration (DOA) and the Division of Resolutions and Receiverships (DRR). We appreciate the review work performed by the OIG and that as noted in its report a preponderance of CB Richard Ellis (CBRE) claims were adequately supported, consistent with the terms and conditions of the contract, allowable, and reasonable. However, we recognize that certain claims did not conform to the terms ofthe contract. This response outlines the planned corrective actions for each of the recommendations cited in the OIG's Report. MANAGEMENT DECISION Finding: Claims Paid were not Consistent with Contract Terms Recommendation 1: That the FDIC disallow $22,553 for amounts that CBRE claimed and the FDIC paid that were not consistent with the contract terms, not of claims that CBRE could have but did not make. Management Response 1: DOA and DRR concur with the recommendation. Corrective Action: The DOA contracting officer will issue a written demand to CBRE to recover $22,553. A copy of the check will be provided as proof of recovery. Completion Date: Juno 5, 2012 19 Sensitive Information -- For Official Use Only Page 28 Appendix 4 Corporation Comments Recommendation 2: That the FDIC disallow $19,462 that CBRE claimed and the FDIC paid that CBRE could not adequately support as consistent with the contract terms. Management Response 2: DOA and DRR concur with the recommendation. Corrective Action: The DOA contracting officer will issue a written demand to CBRE to recover $19,462. A copy of the check will be provided as proof of recovery. Completion Date: June 5, 2012 Recommendation 3: That the FDIC consider disallowing an additional $356,212, which represents the statistically valid minimum of projected questioned costs of $398,227 less $42,015 in questioned costs identified through items tested. Management Response 3: Although DOA and DRR acknowledge that the projected questioned costs may be statistically valid, management has decided not to pursue collection of projected questioned costs based on the low error rate in the sample and the probability that collection costs would exceed recoveries. at (703) 562-2118. If ion have any questions regarding this response, the point of Contact for DOA is 20 Sensitive Information -- For Official Use Only Page 29 Appendix 5 Summary of FDIC Management's Response to the Recommendations This table presents FDIC management's response to the recommendations in our report and the status of those recommendations as of the date of report issuance. Expected Rec. Completion Monetary Resolved?' Open No. Corrective Action: Taken Planned Date Benefits Yes No Closed 1 The DOA contracting officer will issue a June 5, 2012 $22,553 Yes Open written demand to CBRE to recover $22,553. A copy of the check will be provided as proof of recovery. 2 The DOA contracting officer will issue a June 5, 2012 $19,462 Yes Open written demand to CBRE to recover $19,462. A copy of the check will be provided as proof of recovery. 3 Although DOA and DRR acknowledge that $356,212 Yes Closed the projected questioned costs may be statistically valid, management has decided not to pursue collection of projected questioned costs based on the low error rate in the sample and the probability that collection costs would exceed recoveries. 3 Resolved -- (1) Management concurs with the recommendation, and the planned, ongoing, and completed corrective action is consistent with the recommendation. (2) Management does not concur with the recommendation, but alternative action meets the intent of the recommendation. (3) Management agrees to the OIG monetary benefits, or a different amount, or no amount. Monetary benefits are considered resolved as long as management provides an amount. Recommendations will be closed when Corporate Management Control notifies the OIG that corrective actions are complete or for recommendations that the OIG determines to be particularly significant, when the OIG confirms that corrective actions have been completed and are responsive. 21 Sensitive Information -- For Official Use Only