Friday, September 20, 2019

Another Government Agency Finds Deficiencies in its Internal Controls over Employee Travel Card Usage

Do you give out credit cards and travel cards to your employees? If so, how confident are you that your internal controls are working, if you have any internal controls at all? If you're like most small firms, your policies are largely based on trust. But, as you no doubt know, 'trust' is not an internal control. Trust is important in any organization, but it is not an internal control.

The Government is a major user of travel cards but audit after audit show that the Government, with all of its controls and oversight (approvers checking the travelers, managers checking the approvers, and auditors checking the managers) they still have issues and deficiencies in managing their credit/travel card programs.

The Government Charge Card Abuse Prevention Act of 2012 requires OIGs (Office of Inspector Generals) of agencies with more than $10 million in travel card spending to conduct period audits of reviews of travel card programs to analyze risks of illegal, improper or erroneous purchases and payments.

The EPA (Environmental Protection Agency) Office of Inspector General (OIG) recently completed a risk assessment of the Agency's travel card program and decided there was enough risk to merit a full audit. The OIG found employees who had been separated from service with active travel cards. They found irreconcilable differences between transactions and bank records (Citibank records in this case). The OIG found reports with 'blank' columns where data should be listed. They also found that they couldn't determine how much 'credit' was remaining on travel cards.

You might want to read how one highly trusted contractor employee used a company issued credit card to embezzle $825 thousand from his company.

You might also be interested in our article on how to improve controls over credit card usage.

Thursday, September 19, 2019

Improper Business Practices - Gratuities to Government Personnel

This is the third installment in our periodic series on improper business practices as laid out in FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and anti-trust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more. In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. Today, in Part 3, we will be discussing the prohibition against offering gratuities to Government personnel.

One of the standard contract clauses included in Government contracts is found in FAR 52.203-3, Gratuities. It holds that the rights of contractors to proceed may be terminated by written notice if the Government determines that the contractor (or its agency, or another representative) offered or gave a gratuity (e.g. entertainment or gift) to a Government employee and intended, by the gratuity, to obtain a contract or favorable treatment under a contract. If the contract is terminated under this clause, the Government is entitled to pursue the same remedies as in a breach of contract and to seek exemplary damages (if the contract involves Defense Department funds).

In addition to terminating the contract (or contracts), the Government may also initiate debarment or suspension measures (FAR 9.4). Government employees, under the same FAR provision, are obligated to report such gratuities as well as attempts by contractors to offer gratuities.

Termination, debarment, and suspension is bad enough but the consequences could get much worse for both contractors and Government employees caught exchanging gratuities for favored treatment. As readers of this blog are aware, the Government prosecutes these activities under several different criminal statutes resulting in significant monetary penalties and, in some case, prison time for the practitioners.

Many contractors have established a zero-tolerance policy for gratuities of any amount, including, in some cases, even a complimentary cup of coffee. Many Government employees (particularly audits and contracting officers) have also developed a zero-acceptance of any thing that could even be remotely construed as a gratuity, including refusing an "offered" cup of coffee.

Wednesday, September 18, 2019

Contractor Settles Double Billing Discovery for $1 Million

FAR (Federal Acquisition Regulations) limit the amount of rent or lease costs paid to related parties that Government contractors can claim under their contracts. FAR 31.205-36(b)(3) states that:
Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance, are allowable.
We've written extensively on these limitations in past postings. See, for example, Rent Paid to Related Parties but we continue to find and hear about examples where contractors use bases other than cost of ownership when applying related party rental/lease payments to their Government contracts.

Earlier this month, the Justice Department announced a settlement wherein a Michigan Government contractor (and two of its employees) will pay back $1 million to resolve allegations that it did not comply with this related party rent/lease limitation. In addition, the Contractor and two of its employees are prevented from bidding on federal awards and contracts for the next three years. The company is also required to maintain an ethics and compliance program and retain a Corporate Ethics Monitor to review and report on the company's compliance with Government contracting requirements.

According to the Justice Department, GS Engineering, Inc. (GSE) double-billed the Government by fully depreciating certain data acquisition equipment, charging that depreciation to Government contracts, then transferring the same equipment to a related company at lease rates that exceeded the cost of ownership. A significant cost of ownership on most leased equipment is depreciation. GSE did this for eight years before a DCAA (Defense Contract Audit Agency) audit disclosed the practice and brought it to a halt.

This area is one in which DCAA has identified as a high audit risk area. If you are claiming rental/lease payments on your Government contracts, expect auditor queries into such payments.

Tuesday, September 17, 2019

GSA Price Reduction Clause

When GSA negotiates its 'multiple award schedule' (MAS) contracts, it relies on discounts, terms, and conditions that contractors offer to other customers. This is commonly referred to 'most favored customer' pricing.

However, the negotiated prices stated in a MAS contract are not necessarily fixed for the entire term of the contract. Most MAS contracts (perhaps all MAS contracts) contain a Price Reduction Clause (GSAR 552.238-81) which imposes a duty to report certain changes in its commercial pricing terms. In some cases, the Price Reduction Clause will require contractors to adjust their fixed prices downward.

The Price Reduction Clause specifies two events that will require contractors to reduce their prices. If the contractor later reduces the list price or otherwise revised the price list or offers more favorable pricing, discounts, or terms to another customer, the contractor must also offer the same deal to the Government. The other requires that the discount percentage offered to the Government must be maintained. If the contractor offers the Government a 15 percent discount off of list price, but later lowers its list price, the contractor must offer the Government the 15 percent discount off of the new list price, even if the old Government price is still most favored.

UPS (United Parcel Service) found about this clause the hard way. The Justice Department just announced a settlement with UPS for $8.4 million to resolve allegations that it overcharged Federal agencies for package delivery services under its GSA contract. From 2007 to 2014, UPS failed to follow the Price Reduction Clause of its GSA contract.

MAS contractors need to establish internal mechanisms to ensure that it maintains pricing integrity on its contracts. Without such internal controls, it is too easy to forget about contractually require duties and obligations like the Price Reduction Clause.

Monday, September 16, 2019

DCAA to Triple The Number of Defective Pricing Audits

Bloomberg published an article last week reporting that DCAA (Defense Contract Audit Agency) plans to triple the number of defective pricing audits in the upcoming fiscal year. Defective pricing audits are tests for contractor compliance with the Truth in Negotiations Act (TINA).

According to the article, DCAA intends to complete 60 defective pricing audits in the coming fiscal year.  During fiscal years 2017 to 2019, the Agency completed 26, 21, and 20 respectively. Bloomberg notes that at least two congressional committees are reviewing the Pentagon's enforcement of TINA, a law intended to prevent unjustified profits based on incomplete, flawed or inaccurate cost or pricing data (actually the term "flawed" is not part of TINA. TINA refers to 'current', 'complete', and 'accurate').

Not only does DCAA intended to triple the number of audits it intends to complete but it also plans to quintuple the number of audit hours applied to those reviews.

One of the reasons, besides ongoing Congressional oversight, for the increase in the number of defective pricing audits is the track record of positive audit findings. The former Director for defense pricing noted that during his tenure, 100 percent of the contracts examined at one top-25 defense contractor had 'suspect' defective pricing. And he also added that "If one looks deep enough there is some element of fraud typically lurking". For example:
In a number of cases we expected profit outcomes of 12% to 15% ... but (the auditors) found levels of between 25% and 80% on some sole-source weapons contracts. That does not happen by outstanding performance but by faulty contractor cost estimating or in the worst case, fraud.
Since fiscal year 2015, nearly 75 percent of defective pricing audits have uncovered potential noncompliances with TINA. The amount challenged is almost $600 million (though after the issues are settled, will be something less than that). Ten of those audits have been referred to investigators as suspected irregular conduct and eight of those ten are currently active cases.

TINA applies to negotiated contracts over $700 thousand or $2 million, depending upon when the contracts were negotiated. Competitively awarded contracts and contracts based on commercial item pricing are not subject to TINA. It is likely that DCAA will be concentrating its efforts on the larger Defense contracts; the top 10 or the top 25. If you don't fall in those categories, it is unlikely that your contracts will be selected for audit.