Thursday, May 26, 2011

Access to Records - To Provide or Not to Provide

For the past couple of days, we've been discussing the Government's right to access Government contractors' books and records. While avoiding a detailed exposition of all of the statutory and regulatory, not to mention contractual provisions that allow the Government access to books and records required to conduct audits, we laid out the idea that contractors wanting to pursue Government contracts must be prepared to open their books to the Government's auditors, contract administrators, and technical representatives.

The statutes and regulations and relevant auditing standards are finely crafted to ensure that only such records as are necessary to meet the audit objectives should be requested and need to be furnished. However, auditor judgment plays a big part in determining what records are necessary. In a recent case, an auditor requested to review a contractors basis for estimating the cost on a subcontract. Since the audit was of a price proposal, that was a reasonable request. The auditor wanted to ensure that the contractor followed its own estimating policies and procedures to get the best price. However, once the file was turned over to the auditor, the auditor then proceeded to request copies of every email that passed between the contractor and each of the offerors submitting bids for this particular subcontract. We advised the prospective contractor not to provide emails because (i) it was not a reasonable request, (ii) it had nothing to do with establishing the reasonableness of the proposed subcontract price, (iii) it was onerous on the contractor, and (iv) there was no way to ensure that "every" email could be located.

The difficult part in responding to requests for data is determining where to draw the line. Most contractors try to avoid conflicts by providing everything that is requested of it, relevant or not. However, as we've stated in this blog on several occasions, never assume that an auditor coming into your facility is only interested in the audit being performed. The goods ones will be making observations and developing audit leads for future reviews. There are no innocuous questions - every question is designed to solicit data and information. They'll be scanning for idle facilities and idle capacity, observing how full the parking lots are, and looking at organization structures (a four person company should not have a highly compensated VP of Finance who happens to be the founder's son, who happens to drive a BMW, and who is never around). We could recount many cases where information provided in one context, is used later in another.

Tomorrow we will conclude this series by telling you what you can expect if you deny the Government access to certain books and records.

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