THE FCA CORPORATION

Background

The FCA Corporation, as part of its varied operations, performs complex tests and analyses of the chemical composition of fluids. The FCA Corporation does this for numerous clients on a cost reimbursement plus fee basis.

The tests and analyses are accomplished by processing fluid samples provided by the client or obtained by FCA employees at the client's site. Samples are processed using special state-of-the-art analysis machines that cost approximately $500,000 each and require frequent calibration and maintenance. Technicians process the samples under the supervision of chemists and chemical engineers. The chemists and engineers interpret sample processing results and provide reports to clients concerning the composition of the samples and the implications of the presence of various elements.

Good laboratory practices, as mandated by government and industry standards, are to be adhered to during sample processing and analysis. The main requirements are to document procedures performed and regularly review the quality control procedures used.

The equipment used in performing the testing and analysis is located in special laboratory facilities dedicated solely to processing samples.

Internal audit has been requested by management to audit the operations of the special laboratory facility to determine compliance with company policies and procedures and client contractual requirements and to evaluate the effectiveness and efficiency of practices within the laboratory.

Laboratory Operations

Clients are charged a rate per hour of machine time used in processing a sample. The rate is established based on the estimated costs of operating the facility and the estimated hours of machine time used to process samples. The rate is to be based on cost since the majority of samples are analyzed under cost reimbursement contracts that have specific requirements concerning costs and cost allocations. Technician labor costs for processing client samples are also charged directly to the client, as are chemists' and engineers' labor costs for evaluating and interpreting sample results. Labor costs for maintenance, training, downtime, etc., are charged to the facility cost pool.

Each machine produces printed output that contains various numerical and graphic data from various points in the analysis process. For each machine, technicians also maintain manual log books in which they record various "readings" from the machine during the analysis process, procedures actually performed, and their sample composition conclusions based upon observations made during sample processing.

The amount of machine usage to be charged to the client is determined manually by the technician (there is no "stop watch" on the machine). The usage is reported monthly to the accounting department for billing to the client. The labor charges for the technicians, chemists and engineers are also reported monthly to the accounting department for billing to the client.

Internal Audit Review
The internal audit staff reviewed the laboratory operations and noted the following items:

The analyzer machines required "warm-up" time at the start of each day's activity. This time was charged in some cases directly to clients and in other cases it was charged to the laboratory operation's overhead.

Machine set up was different depending upon the type of sample and client requirements. In some cases this cost was charged directly to clients and in other cases it was charged to laboratory operations overhead.

Quality control personnel would periodically run random QC samples during sample processing for all clients. They would also run specific quality control samples required by the client. If the QC sample did not meet standards, the machine would be recalibrated and client sample processing would be restarted. The QC testing was charged to laboratory overhead. Machine time and technician labor spent on sample processing that could not be used was in some cases charged to the client and in other cases charged as laboratory overhead.

During sample interpretation by the chemists and engineers, it was sometimes found necessary to rerun the sample to obtain additional data (through different calibration settings, etc.) When this occurred, the rerun time was sometimes charged to the client and sometimes charged to the laboratory overhead.

Machine logbook maintenance varied by technician. Technicians were not assigned to specific machines - rather they used machines as available. Some technicians recorded all results while others did not record QC results. Results that needed to be rerun may or may not have been recorded. The laboratory supervisor and/or quality control personnel reviewed the logbooks only when someone subsequently had a question about sample processing and/or specific sample results.

Technicians reported machine usage to the laboratory supervisor at the end of the month verbally or on handwritten notes. There was no required method for the technician to determine and document usage. The supervisor then prepared a usage form for each client and sent it to accounting for billing to the client

The machine usage rate charged to clients had not been changed in three years. The laboratory operations had the following operating results (exclusive of fee) in the three prior years:

Year one: Revenue - $5,600,000; Expenses - $6,200,000;
under-recovery - $600,000.

Year two: Revenue - $6,700,000; Expenses - $6,600,000;
over-recovery - $100,000.

Year three: Revenue - $7,700,000; Expenses - $7,000,000;
over-recovery - $700,000.

The laboratory supervisor generally would not allow usage and labor charges reported to the accounting department for a client to exceed amounts that had originally been estimated or proposed to the client.

Preventive maintenance on the machines was generally performed during slack periods by the technicians on an ad hoc basis and was not documented.

Required

Using the results of the audit review, develop findings and recommendations for management. Keep in mind that under the terms of the cost reimbursement contracts, amounts charged to clients have to be based on actual costs and be allocable to the client.

Do not include the question in your response and use bullet points.