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Ethics Corner 

Industry Should Prepare for Review of Ethics Programs 

12  2,009 

By Dorn C. McGrath and Sean M. Connolly  

Contractors may soon have more complete answers as to how the Defense Department will verify contractor compliance with the Federal Acquisition Regulation’s recent ethics program requirements. 

For contracts projected to exceed $5 million with 120 days or more of performance, FAR 52.203-13 has mandated that most contractors have written codes of ethics and conduct, ethics awareness and compliance programs and internal control systems. Since the new requirements came into effect in December 2007, contractors have wondered how contracting officers would verify compliance with these requirements. Until recently, the answer simply has been, “contracting officer discretion.” However, in addition to recently revised Defense Contract Audit Agency’s audit guidance covering the ethics requirements, the Government Accountability Office has new suggestions for the Defense Department.

Beginning in May 2008, GAO conducted a 16-month audit of major defense contractor internal ethics programs as required by Congress. The audit, which began prior to implementation of the December 2008 revision to the regulation, reviewed 57 major defense contractors. While 55 contractors already had ethics programs that included many of the FAR’s new rules, the focus of GAO’s review was not to test contractor compliance. It simply assessed the impact of the new rules on the department’s oversight of contractor ethics programs. GAO concluded in its September 2009 report, “Defense Contracting Integrity, Opportunities Exist to Improve DoD’s Oversight of Contractor Ethics Programs,” that additional department oversight during contract administration would help ensure that such programs are in place and functioning.

Early in its review, GAO noted that DCAA originally had planned only minor changes to audit guidance in response to the expanded contract clause. Under DCAA’s July 2009 guidance, auditors are required to incorporate new procedures during “Control Environment and Overall Accounting System Control” audits to address the ethics requirements. This guidance, which is included in DCAA’s Contract Audit Manual, provides step-by-step instructions to auditors for ensuring contractor compliance with the ethics program mandate. The agency already has implemented this new policy and issued detailed requests to defense contractors to verify compliance with the rules delineated in the ethics program.

The regulation also requires mandatory self-reporting by contractors of certain criminal law and civil False Claims Act violations. While the office of the inspector general is not in a monitoring mode when it comes to ethics programs, it may receive and review conduct reported by DCAA, as well as by individuals calling the department’s hotline, or contractors reporting violations through the contractor disclosure program, GAO noted.

The report also found that there is an initial opportunity to verify contractor compliance during contract formation and administration, where it is easier to avoid adverse impact on contract performance.  The regulation does not specifically dictate or assign this oversight responsibility, and GAO determined there is no consensus within the Defense Department on where the responsibility for verifying contractor ethics programs would lie.

The report suggests that this contract administration task logically falls within the Defense Contract Management Agency’s role of monitoring contractor performance as the department’s lead contract administration agency, complemented by the DCMA contract integrity center’s focus on procurement fraud. However, there is conflict within the agency as to whether the duty fits within its functional responsibility. Regardless, additional contract administrative review is likely on its way.

GAO’s report highlights the resolve of Congress to ensure that the ethics requirements developed over the last couple of years have teeth and are implemented as intended. It ultimately recommended that the defense secretary direct the under secretary of acquisition, technology, and logistics to determine the need for new guidance clarifying contract administration responsibilities for monitoring and approving defense contractor ethics programs. The department concurred and is referring GAO’s recommendation to the defense acquisition regulation council.

All contractors should know and understand the new ethics program requirements and be prepared for review and verification.

Dorn C. McGrath is a shareholder and Sean M. Connolly is a senior associate with the government contracts practice group and the defense and homeland security practice group in the international law firm of Greenberg Traurig, LLP.  The views expressed are solely those of the authors.
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