The current environment of corporate failings and economic uncertainty has the government scrambling to create updated accounting practices and operating procedures. One recent addition is a new Air Force “Contracting Officers’ Guide to Bankruptcy” at www.safaq.hq.af.mil/contracting/. The new guidance gives COs new procedures for handling contractor bankruptcies.
The Guide provides basic bankruptcy law information including types of bankruptcies. It direct COs to independently verify the bankruptcy status of the contractor by confirming court filings and asks the CO to compile information on the financial status of the contract along with possible claims the contractor may bring or the government may have against the contractor. The CO is told to determine whether (1) the contractor’s performance has been acceptable and if continued performance by the contractor is desired (2) there is any default needing to be cured (3) the contract should be terminated either for convenience or default and (4) it is acceptable to transfer the contract – with Air Force approval – to another contractor. The Guide advises COs to “keep a ready ear” for subcontractors and suppliers’ complaints about discontinued payments but advises against direct payments to subcontractors on the grounds it would be unfair to other subcontractors and would be a breach of contract to prime contractors.
A recent article in the August 20th issue of Federal Contract Report by Peter McDonald of KPMG and Paul Pompeo of Holland & Knight suggest that recent proposals to increase identification of fraud when conducting normal financial audits will bring audit scrutiny up to the level of fraud detection by government contracting auditors. Though the recent proposals will not likely increase fraud detection by government auditors, the increased effort by financial auditors will result in increased visibility for the government from, for example, voluntary disclosures by firms and access to financial workpapers by government auditors.
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