We've written quite a bit about the FAR requirement for contractors to maintain codes of business ethics and conduct. At a minimum, Government contractors must have their codes in writing, make them available to every employee and exercise due diligence to prevent and detect criminal conduct and promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. There are more requirements applicable to non-small businesses.
While the requirement was published a number of months ago, there was no assignment of a Government oversight role. We speculated once that DCAA would review for compliance in conjunction with audits of contractor accounting systems because there is a large component of the standard audit program dealing with contract ethics. These reviews however are few and far between because they are only performed at contractors with $100 million or more in annual costs under cost-reimbursable contracts.
The lack of Government oversight has now been fixed. The FAR Councils have added to the list of contract administration functions in FAR 42.302, a requirement to ensure that contractors have implemented the mandatory contractor business ethics program requirements of FAR 52-203-13. This change, published and effective today, was made in response to recommendations from a recent GAO report on strategies to improve the effectiveness of the Government's oversight of contractor business ethics and conduct programs.
Contractors should expect some form of communication from contract administration (e.g. DCMA) regarding this added function and possibly some implementing procedures they will follow to ensure contractor compliance.
Tuesday, May 31, 2011
Friday, May 27, 2011
Access to Records - When Disputes are not Resolved
Companies desiring to enter the Government contracting arena must be prepared to open their books and records to the Government. Whether its estimating, purchasing, billing, tracking (e.g. EVMS), or quality, there is always the potential for someone from the Government to peer over contractors' shoulders to see if they're doing things correctly. The relevant statutes, regulations, and contractual provisions however do not give the Government access rights to anything and everything. There must be a nexus between the purpose of the audit or purpose of the review and the records being requested. If contractors have any concern over the relevance of any requested record, auditors must be prepared to discuss the basis for the request.
Once in awhile, the contracting parties reach an impasse. The Government determines that a particular record is absolutely critical to its review to the extent that it cannot proceed or express an audit opinion without it. The contractor is just as adamant that the data is not required and refuses to turn provide it to the Government. When elevating the issue up the various levels within the respective organizations fails to resolve the issue, the Government can and will take a number of actions.
If the audit pertains to forward pricing, claims, terminations, or requests for equitable adjustment, auditors will question any costs that are not adequately supported. If the amount in question is significant, the auditor will express an opinion to the effect that the contractors proposal (or assertion) is not acceptable as a basis for negotiating costs. This will most likely halt any negotiations.
If the audit pertains to incurred costs, billings, progress payments, or billing rates, the auditor will suspend or disapprove costs that are not supported. This action could have a detrimental impact on a contractor's cash flow situation.
Most audit agencies have subpoena authority. DCAA's own guidance lists subpoena power as one possibility for compelling contractors to provide requested data. However, DCAA has not issued a subpoena in more than 20 years so that seems an unlikely option. Its much more expedient for the Government to disallow or question costs.
The Government has the upper hand in these matters. Contractors can choose to forgo contracts and claims or face the prospect of not having all of their allowable and allocable costs reimbursed. However, if these are not desirable outcomes, the Government will ultimately get its way.
Once in awhile, the contracting parties reach an impasse. The Government determines that a particular record is absolutely critical to its review to the extent that it cannot proceed or express an audit opinion without it. The contractor is just as adamant that the data is not required and refuses to turn provide it to the Government. When elevating the issue up the various levels within the respective organizations fails to resolve the issue, the Government can and will take a number of actions.
If the audit pertains to forward pricing, claims, terminations, or requests for equitable adjustment, auditors will question any costs that are not adequately supported. If the amount in question is significant, the auditor will express an opinion to the effect that the contractors proposal (or assertion) is not acceptable as a basis for negotiating costs. This will most likely halt any negotiations.
If the audit pertains to incurred costs, billings, progress payments, or billing rates, the auditor will suspend or disapprove costs that are not supported. This action could have a detrimental impact on a contractor's cash flow situation.
Most audit agencies have subpoena authority. DCAA's own guidance lists subpoena power as one possibility for compelling contractors to provide requested data. However, DCAA has not issued a subpoena in more than 20 years so that seems an unlikely option. Its much more expedient for the Government to disallow or question costs.
The Government has the upper hand in these matters. Contractors can choose to forgo contracts and claims or face the prospect of not having all of their allowable and allocable costs reimbursed. However, if these are not desirable outcomes, the Government will ultimately get its way.
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.
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.
Wednesday, May 25, 2011
Access to Records - Denial by Contractors
We began a discussion of access to records by Government auditors yesterday. Today we will continue that discussion.
Auditors are required by Generally Accepted Government Auditing Standards (GAGAS) to develop sufficient, competent, evidential matter to support their conclusions and recommendations. Requests for such data, records, and information must be relevant to the audit being performed. There is no basis in any regulations, statute, or contract provision that authorizes auditors access to records beyond what is necessary to perform the audit.
If it is not intuitively obvious to contractors why certain requested data is relevant to the audit being performed, contractors should inquire as to the purpose or the intended use of the data. Auditors are required to be prepared to answer such questions. If the auditor cannot do so to the contractors' satisfaction, denying access may be appropriate. Of course, from an auditor's perspective, denials tend to be met with suspicions that the contractor may be hiding something. Therefore, while denial might be appropriate, it may not be advisable.
Once denial is alleged by the Government, the issue is raised to higher and higher levels within the contractors' and governmental organizations. At some point, the issue is resolved or the Government seeks a subpoena. In practice however, these issues are generally resolved at low levels. Common sense usually prevails is such matters. However, the Government has published guidelines on conditions that qualify as access to records problems. These include:
Auditors are required by Generally Accepted Government Auditing Standards (GAGAS) to develop sufficient, competent, evidential matter to support their conclusions and recommendations. Requests for such data, records, and information must be relevant to the audit being performed. There is no basis in any regulations, statute, or contract provision that authorizes auditors access to records beyond what is necessary to perform the audit.
If it is not intuitively obvious to contractors why certain requested data is relevant to the audit being performed, contractors should inquire as to the purpose or the intended use of the data. Auditors are required to be prepared to answer such questions. If the auditor cannot do so to the contractors' satisfaction, denying access may be appropriate. Of course, from an auditor's perspective, denials tend to be met with suspicions that the contractor may be hiding something. Therefore, while denial might be appropriate, it may not be advisable.
Once denial is alleged by the Government, the issue is raised to higher and higher levels within the contractors' and governmental organizations. At some point, the issue is resolved or the Government seeks a subpoena. In practice however, these issues are generally resolved at low levels. Common sense usually prevails is such matters. However, the Government has published guidelines on conditions that qualify as access to records problems. These include:
- Contractor refusal to provide access to any requested record including support for unclaimed costs excluded under CAS 405 or records maintained in an electronic or optical format.
- Unreasonable delays by contractor representatives in permitting the audit commencement or in providing access to needed data or personnel.
- Restrictions on reproduction of necessary supporting evidential matter.
- Partial or complete denial of access to internal audit data or other management reports on contractor operations.
- Denial of access to the contractor's data base.
- Chronic failure of contractor personnel to comply with agreed-to dates for furnishing data.
- Assertion of attorney-client privilege or attorney work product rule. The auditor is not in a position to accept a claim of attorney-client privilege or the work product rule. Therefore, auditors are instructed to obtain a legal opinion from counsel when a claim of privilege is made.
Tuesday, May 24, 2011
Access to Records
There are many statutes, implementing regulations and contract terms that provide access to contractor records for purpose of audit by GAO, the Inspector General (IG) organizations, and contracting officer (CO) representatives usually meaning the cognizant contract audit organization. The Government has clearly defined rights to come in and audit the books and records of Government contractors. The right of access however does not extend beyond what is reasonably required for the audit being performed. We hear from time to time including a case last week where auditors request books and records that do not, on the surface, pertain to the matter at hand. So we think that it would be opportune to review the policies. We do so from the guidance published for the DoD contract auditors.
Inherent in audit responsibility is the right of auditors to determine the specific records or other evidential matter needed to accomplish the audit. Auditors must adhere to generally accepted Government auditing standards in determining what comprises competent, relevant, and sufficient evidential matter. Therefore, auditors must use good judgment and rationale in deciding what contractor records or other evidential matter should be sought. In determining the sufficiency of evidence needed, auditors must consider the audit objective, the risk, and materiality of an error or misstatement in the area being audited and the effect on the audit opinion (see CAM 1-504.1.d.)
Most of the time, auditors will make informal requests (either orally or as a written list) for records. The audit need for the requested information is rather obvious and the records are routinely provided. For example, an auditor, reviewing incurred costs claimed for reimbursement might request to review the support for a material purchase. Keeping things informal greatly facilitates the audit and that is to the benefit of both the auditor and the contractor.
Sometimes, however, auditors will make requests for data and records that, in the contractors judgment, have no bearing on the matter under audit. In those cases, contractors should question the relevancy of the request. According to DoD guidance, auditors must be prepared to discuss the basis for the request and to explain the underlying audit need (see CAM 1-504.36.a). A retort along the lines "because I want it" as we recently witnessed, is not satisfactory or compliant with DoD guidance.
Unusual or extensive requests must be made in writing by someone higher than the auditor (see CAM 1-504.36.e). "Unusual or extensive" is not defined so that could potentially become an issue in itself. Auditors are not permitted to remove original records from the contractor premises. They can make (or request) copies of pertinent records for working paper documentation. However, auditors should not request contractors to reproduce records so that he/she can work at home (or another worksite).
Inherent in audit responsibility is the right of auditors to determine the specific records or other evidential matter needed to accomplish the audit. Auditors must adhere to generally accepted Government auditing standards in determining what comprises competent, relevant, and sufficient evidential matter. Therefore, auditors must use good judgment and rationale in deciding what contractor records or other evidential matter should be sought. In determining the sufficiency of evidence needed, auditors must consider the audit objective, the risk, and materiality of an error or misstatement in the area being audited and the effect on the audit opinion (see CAM 1-504.1.d.)
Most of the time, auditors will make informal requests (either orally or as a written list) for records. The audit need for the requested information is rather obvious and the records are routinely provided. For example, an auditor, reviewing incurred costs claimed for reimbursement might request to review the support for a material purchase. Keeping things informal greatly facilitates the audit and that is to the benefit of both the auditor and the contractor.
Sometimes, however, auditors will make requests for data and records that, in the contractors judgment, have no bearing on the matter under audit. In those cases, contractors should question the relevancy of the request. According to DoD guidance, auditors must be prepared to discuss the basis for the request and to explain the underlying audit need (see CAM 1-504.36.a). A retort along the lines "because I want it" as we recently witnessed, is not satisfactory or compliant with DoD guidance.
Unusual or extensive requests must be made in writing by someone higher than the auditor (see CAM 1-504.36.e). "Unusual or extensive" is not defined so that could potentially become an issue in itself. Auditors are not permitted to remove original records from the contractor premises. They can make (or request) copies of pertinent records for working paper documentation. However, auditors should not request contractors to reproduce records so that he/she can work at home (or another worksite).
Monday, May 23, 2011
Business Systems Rules - Summary of Changes
Last week we reported that DoD had issued an interim rule in its FAR Supplement designed to improve the effectiveness of DoD oversight of contractor business systems (i.e. withhold contract funds until contractors fix their systems). We've watch these rules evolve through two iterations of proposed rules very closely and so did a lot of people judging by the extraordinary number of responses submitted to DoD. Comments certainly matter because there were many changes between the first and second proposed rules and the second and this interim rule. There is also a comment period for the interim rule that runs through July 18, 2011.
You can read our previous coverage on business systems by using the search box to your right. Just search on the term "business systems".
Within the results you will find the criteria of what constitutes an adequate system for each of the six business systems covered by this interim rule; accounting, estimating, purchasing, EVMS, MMAS, and property management.
Following is a summary of the rule changes from the previous draft.
You can read our previous coverage on business systems by using the search box to your right. Just search on the term "business systems".
Following is a summary of the rule changes from the previous draft.
1. The term ``significant deficiency'' is defined as a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.
2. While the proposed rule allowed for the implementation of payment withholdings with or without disapproval of system deficiencies that adversely affect the contractor's business systems, this interim rule sets forth requirements that a contracting officer's final determination shall include a disapproval of the contractor's business system and the implementation of payment withholdings if a significant deficiency still exists after the contracting officer's evaluation of the contractor's response to the initial significant deficiency determination.
3. Where the proposed rule allowed for system approval after the contracting officer determines that the contractor has substantially corrected the system deficiencies removing the potential risk of harm to the Government, this interim rule requires that there are no remaining significant deficiencies before a system is approved.
4. The contracting officer will be required to reduce a payment withholding by at least 50 percent if the contracting officer has not made a determination whether the contractor has corrected all significant deficiencies as directed by the contracting officer's final determination, or has not made a determination whether there is a reasonable expectation that the corrective actions have been implemented.
5. The 16-month timeframe for completion of a contractor's initial Earned Value Management System validation has been revised to allow for a timeframe that is approved by the contracting officer to allow for flexibility in the initial validation process.
6. The term ``covered contract'' has been defined as a contract that is subject to the Cost Accounting Standards under 41 U.S.C. chapter 15, as implemented in regulations found at 48 CFR
(a) The clause prescription for the clause at 252.242-7005, Contractor Business Systems, requires that the resulting contract will be a ``covered contract,'' which exempts small business contracts. Consequently, all language pertaining to payment withholdings for small business has been struck from the rule.
(b) While the proposed rule set forth a $50 million contract threshold for the incorporation of the clause at 252.242-7005, Contractor Business Systems, this interim rule prescribes the incorporation of the clause for covered contracts in accordance with the established definition.
7. The proposed rule applied payment withholdings against all contracts that contained the clause at 252.242-7005, Contractor Business Systems. This interim rule allows the contracting officer the discretion to withhold payments from one or more contracts containing the clause.
8. This rule revises procedures for the implementation of payment withholdings by replacing the requirement for contracting officers to issue unilateral modifications with the requirement to issue written notifications. Therefore, references to unilateral modifications for payment withholding as well as the sample language for the unilateral modifications have been deleted from this rule.
9. The clause prescription at 242.7002 for the clause at 252.242-7005, Contractor Business Systems, is revised to exempt contracts with educational institutions or Federally Funded Research and Development Centers (FFRDCs) operated by educational institutions.
10. The references to construction contracts that include the clause at FAR 52.232-27, Prompt Payment for Construction Contracts, under 242.7502(a), 242.7503, and 252.242-7005 have been removed as unnecessary.
11. The initial written determination language under 242.7502(d)(2)(ii)(A) has been revised to provide a description of each significant deficiency in sufficient detail to allow the contractor to understand the deficiency.
12. The term ``business system'' is replaced with the term ``contractor business system.''
13. The total percentage of payments that may be withheld on a contract shall not exceed 10 percent. Additionally, while multiple payment withholdings may be implemented due to significant deficiencies in multiple contractor business systems, for clarity, the interim rule limits the total percentage of payments withheld to five percent for one or more significant deficiencies in any single contractor business system.
14. The accounting system criteria under 252.242-7006(a)(1) has been revised to delete the unnecessary phrase ``that is adequate for producing accounting data that is reliable and costs that are recorded, accumulated, and billed on Government contracts in accordance with contract terms.''
15. The purchasing system criteria under paragraph (c) of the clause at 252.244-7001, Contractor Purchasing System Administration, has been revised to add paragraph (24) requiring contractors to establish and maintain procedures to notify the Contracting Officer in writing if--
(a) The Contractor changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of work to be performed under the contract, task order, or delivery order. The notification shall identify the revised cost of the subcontract effort and shall include verification that the Contractor will provide added value; or
(b) Any subcontractor changes the amount of lower-tier subcontractor effort after award such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract. The notification shall identify the revised cost of the subcontract effort and shall include verification that the subcontractor will provide added value as related to the work to be performed by the lower-tier subcontractor(s).
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